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How To Buy A House When You’re Self-Employed

Molly Grace4-Minute Read
July 17, 2020

*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

You started your business because you wanted the freedom of being your own boss, but now you’ve heard that being self-employed can make getting a mortgage nearly impossible.

Does owning your own business mean you can’t own your own home? Let’s take a look at some of the challenges that self-employed mortgage applicants face and how you can overcome those challenges to achieve your next big goal: homeownership.

Can I Buy A Home If I’m Self-Employed?

Deep breath – it’s absolutely possible to buy a home while being self-employed.

However, you’ll encounter some unique challenges during the mortgage approval process that other types of workers don’t generally have to deal with, particularly when it comes to providing documentation.

Getting A Mortgage When You’re Self-Employed

Mortgage lenders have a vested interest in making sure borrowers will be able to repay their loans. Having a steady income is a vital part of that, which is why a big part of the mortgage application process involves verifying employment and income.

For employees who receive a W-2 and regular paystubs, this is relatively straightforward. For self-employed individuals, the process isn’t as simple. Self-employed borrowers aren’t just proving they earn an income, they also must show that their business is profitable and would enable them to make their monthly mortgage payments in the long term.

This means mortgage lenders will be looking at the stability of your income, the location and nature of your business, how strong the business is financially and its ability to continue generating enough income for you to be able to afford your mortgage payments.

Requirements For Self-Employed Applicants

If you’re wondering whether mortgage approval is within the realm of possibility for you, here are some things lenders typically require of their self-employed borrowers.

Who Is Considered Self-Employed?

Applicants who have a 25% or greater ownership interest in a business are considered to be self-employed. This includes freelancers, independent contractors, small business owners and the like.

Self-Employment Work History

Mortgage lenders want to see that you have a track record of successfully running your business. This means you’ll usually need to have been in business for at least 2 years and be able to provide documentation showing that your income has remained steady or increased.

If you’ve been in business for fewer than 2 years, you still may be eligible for a mortgage if you have recent, related experience in your field.

Say, for example, you worked for several years as a W-2 employee for a large company before deciding to break out on your own doing the same type of work. If you’ve been self-employed for at least 12 months and have earned an income that’s comparable to or greater than what you earned at your last job, you may still be eligible for mortgage approval.

Income Requirements

When it comes to getting a mortgage when you’re self-employed, income stability is key.

Lenders will look over your documentation to get an idea of how much your income fluctuates and whether your income is trending up or down. If your income is unpredictable or trending downward, you’ll likely have trouble qualifying for a home loan.

What Documents Will I Need To Provide?

The exact type of documentation you’ll be asked to provide will depend on your lender, your individual situation and the type of loan you’re getting, but in general, you’ll want to have these documents readily available when you begin the mortgage approval process:

  • 1040s and business tax returns from the last 2 years
  • Year-to-date profit and loss statement
  • Balance sheet
  • Proof your business is operational, such as a signed letter from your CPA verifying that the business exists and that you are the owner of it

This is in addition to all the documentation every mortgage applicant needs to provide. Be prepared to provide information on any additional sources of income you have, statements for bank accounts or other assets you own and information on any debts you owe.

Best Loan Types For Self-Employed Borrowers

If you’re ready to start shopping around for home loans, you may be wondering if there’s a type of mortgage best suited for self-employed borrowers.

The best loan type will depend on your own financial situation. For example, FHA loans are often a good choice for first-time home buyers since they have less-stringent credit requirements compared to conventional loans and allow low down payments.

However, keep in mind that as a self-employed applicant, having a good credit score and putting down a large down payment can help alleviate some of the risks a lender takes in giving you a mortgage. If your current score or savings are lacking, taking some time to work on these factors can get you access to better rates than you’d otherwise get.

If you’re an eligible veteran, you may want to investigate your VA loan options. If you live in an eligible area, a USDA loan might be a better fit. Both loan options can be very affordable with no down payment required.

Or, if you meet the credit requirements, you may opt for a conventional loan. It’s all about what works best for your circumstances.

Self-Employed Borrowers And COVID-19

COVID-19 has brought a lot of changes to the mortgage industry as lenders scramble to figure out what to do with applicants who are suddenly dealing with the economic fallout of the pandemic.

For self-employed borrowers, this can mean increased scrutiny when it comes to the current state of their businesses.

Lenders want to know that you’re still operating, and they want the most recent, up-to-date documentation showing your earnings and how COVID-19 has affected your business.

Additionally, lenders may have larger-than-usual reserve requirements, meaning you’ll have to have a certain number of months’ worth of mortgage payments tucked away in the bank.

The Bottom Line: Get Your Paperwork Ready

If you’ve got a profitable small business, don’t let mortgage documentation requirements trip you up on your way to becoming a homeowner.

If you aren’t the most meticulous about keeping your business records organized, now is the time to set yourself up for success when you apply for a mortgage. By keeping good records of everything and having your documentation ready to go, you’ll be able to clear some of the hurdles that self-employed mortgage applicants commonly encounter.

Get the right home loan for you.

Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.