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Mortgages For Self-Employed Individuals: How To Qualify

Mary Grace Schmid9-Minute Read
September 17, 2022

During the COVID-19 pandemic, many people became self-employed due to the ever-changing conditions of the job market. In fact, as of August 2022, there were about 9 million self-employed workers within the U.S. For those who are self-employed and want to buy a home, the process for applying for a mortgage looks a little different than it is for those who are employed through companies. It’s required to provide documentation that proves that you have a stable income, which can be more challenging when you work for yourself and can’t rely on an employer to provide those documents.

Fortunately, it’s still possible to refinance or purchase a home while you’re self-employed. We’ll review the process of applying for mortgages for self-employed workers and how to improve your eligibility.

How To Get A Mortgage If You’re Self-Employed

To begin, it’s important to note that it’s common for people who are self-employed to refinance or buy a house. Lenders evaluate the same factors for both self-employed workers and corporate employees. Standard factors that are evaluated in your loan application include your credit score and report, work history and debt-to-income ratio (DTI).

For those who are self-employed, the mortgage approval process may present certain challenges when it comes to providing different or additional documentation. Mortgage lenders will ask applicants who are buying a house to verify income stability, business cash flow and more. When you are employed for someone else, the employer can verify your income and its history. Those who are self-employed will need to gather the necessary documents.

If you’re self-employed and interested in purchasing a house in the future, you can start to prepare by asking yourself a few questions. You’ll want to know how you can prove the stability of your income, the location of your self-employment, the financial integrity of your business and if your business will continue to be successful in providing sufficient income in the future.

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Documents Required For A Self-Employed Mortgage Loan

If you want to begin the mortgage process, you’ll need to collect the personal and business financial information that is needed to apply for a mortgage. Self-employed business owners may need documentation regarding how their business operates, tax returns and bank statements.

Here’s what lenders look for when qualifying potential self-employed borrowers.

Income Documentation

Lenders need verification that self-employed borrowers have a steady source of income. These are the documents that you may need to provide to a mortgage lender to prove stable and sufficient income.

  • Personal and business tax returns from the past two years.
  • All tax schedule forms related to those business returns – like Schedules C, E, F, K-1 and 1120S – depending on how your business is set up. For example, if your business is a sole proprietorship, you will have a Schedule C form.
  • Year-to-date profit and loss statements for your business, along with business bank statements for verification. These may or may not have to be audited.
  • Recent business receipts or invoices.
  • IRS transcripts, such as Form 4506-T. This form allows third-party members to access and verify tax records.

Employment Verification

Along with documentation to prove your income, you may need to provide proof of employment. The following are examples of valid employment verification documents that you may need.

  • State or business licenses
  • Proof of insurance for your business
  • Emails or letters from current clients
  • Emails or letters from your certified personal accountant (CPA) or tax preparer
  • Membership confirmation to a professional organization
  • A Doing Business As (DBA)
  • Enrolled agent letter
  • Online third-party verification

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How To Improve Your Eligibility For A Self-Employed Mortgage

Collecting the correct documentation is just one step of preparing for the mortgage application process. You’ll want your application to look its best, so here are some steps you can take to improve your loan application and your eligibility.

Decrease Your Debt-To-Income Ratio

DTI is the percentage of how much money you spend on paying off debts versus how much money is coming in. To calculate, you add up your monthly minimum debt payments and divide it by your monthly pretax income. A person with a low DTI score is viewed as a less risky borrower, making it a high priority qualification for lenders. There are two ways to lower your score: increase your income and pay down your debts.

If you are working to pay down debt while wanting to qualify for a loan, there are a few different strategies. You can pay off debts lowest to highest in terms of total balance (snowball method) or interest rate (avalanche method). You could also pay off items with the biggest monthly payment first so that you can save for a larger down payment, which is especially important for those who are self-employed. Paying off debts with the high monthly payment also creates room in your monthly budget for your mortgage.

For most mortgage options, an ideal DTI percentage is around 43% or lower.

Increase Your Credit Score

Your credit score is an important indicator to lenders that you’re a responsible borrower. They don’t want to risk a loan if there is an unstable credit history. A higher credit score can result in better loam terms and availability of mortgage types. Credit score is based on your credit report, which is essentially a record of your credit transactions and payments. So, to improve your credit score, you can:

  • Check for errors on your report
  • Pay off your credit debt to lower your utilization
  • Continue to make all minimum payments on time

While mortgage lenders and investors have different requirements, the minimum credit score to buy a house with a conventional loan is 620. Having the minimum credit score is important, but it’s always better to have a higher score as it means that you can have lower interest rates.

Get A Co-Signer

Having a co-signer, a person who can and is willing to assume full responsibility for the loan if you default, is not easy. However, if you can find someone who is willing, it can be a huge benefit. Co-signing a mortgage is a major financial responsibility for the other person, but it decreases the perceived risk in the eyes of lenders and increases your eligibility for a self-employed mortgage loan. Remember that, as the primary borrower, you’re still responsible for paying off the loan yourself.

Separate Your Business Expenses

Mixing your personal and work life is tricky to navigate, especially if you want to get a mortgage. By intertwining your business debt with your personal debt, you can actually increase your DTI and risk profile. To increase your eligibility for getting approved for a home loan, work on separating your accounts and keep your quarterly taxes in a separate account from your down payment savings. Consistent and organized separation of business and personal finances will make the mortgage process much simpler for both you and the potential lender.

Mortgages For Self-Employed Borrowers: FAQs

Now that we’ve reviewed the necessary documentation and tips on how to improve self-employed mortgage eligibility, let’s answer any additional questions that you may have about getting a mortgage as a self-employed borrower.

How do I calculate my total income for a self-employed mortgage loan?

You’ll need to refer to your tax returns, particularly the Schedule C form, for your net income for the past 2 years. Simply add the two numbers, then divide by 24.

Do mortgage lenders use gross or net income for a self-employed mortgage?

Lenders will use your net business income, not your gross income, to decide whether or not you can qualify for a self-employed mortgage.  

What are the best types of mortgages for self-employed borrowers buying a house?

People who are self-employed can qualify for the same home loans that any other home buyer can, but it may be harder to qualify for a conventional loan as they aren’t backed by the government. FHA, VA and USDA loans all have different requirements, but may be good options for self-employed borrowers.  

The Bottom Line: Mortgages For Self-Employed Borrowers Require Lots Of Documentation

At the end of the day, lenders want to verify that if they approve a loan, it will be paid on time for the entire duration of the loan. Self-employed borrowers, while dealing with specific challenges that most homebuyers don’t run into, can still qualify for a mortgage with the proper preparation and strategy. By staying organized with your business records, you can start the mortgage application process with ease. And once you have your documents gathered, there are more steps that you can take to increase your eligibility for getting approved. Decreasing your DTI, maintaining a solid credit score, separating your business expenses and even getting a co-signer can help tremendously.

If you are looking to purchase a home, apply today for a home loan with Rocket Mortgage®.

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Mary Grace Schmid

Mary Grace Schmid is a staff writer covering homeownership, personal finance and lifestyle topics. She has a B.A. in public relations from Baylor University with a minor in political science and enjoys photography, music and reading in her free time.