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How To Qualify For A Mortgage When You’re Self-Employed

Molly Grace9-Minute Read
November 24, 2021

According to the latest available data from the U.S. Census Bureau from 2019, there were nearly 8 million businesses in the U.S. Of those, more than 4.3 million had less than five employees. That means a lot of people who are self-employed and running their own businesses.

Self-employed people run the gamut from artists to accountants, members of the gig economy to local shop owners. And yet, our home loan system can seem set up for people who are employed by midsize and larger companies with its requirements for things like pay stubs and W-2s.

Yet, more people qualify as self-employed then that list even seems to indicate. For mortgage purposes, you’re considered self-employed if you have 25% or more ownership in any business. Don’t worry. Today, we’ll touch on how to get a home as a self-employed mortgage applicant.

How To Get A Home Loan When You’re Self-Employed

Deep breath – it’s absolutely possible to refinance or buy a house while being self-employed. In fact, it’s common to do so.

Lenders evaluate the same general factors when someone is self-employed as they would someone who might be working for a corporate employer. For example, in evaluating your loan application, they’ll look at your credit score and report, work history and debt-to-income ratio (DTI).

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 different or extra documentation. The following sections will give you an overview of what you can expect.

Provide 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’re self-employed, but you’re trying to get a mortgage without 2 years worth of work history, you may still 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 equal to or greater than what you earned at your last job, you may still be eligible for mortgage approval.

Prove That You Meet The 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.

In general, mortgage lenders like to see increasing income, but there is some flexibility for year-to-year fluctuation. If they see an income decline greater than 20%, you may be asked for more documentation and be required to document the extenuating circumstances.

Examples of mitigating factors in an income loss from year-to-year might be one-time expenses. If you had stable sales levels, an increase in a variable expense or the cost of goods sold isn’t necessarily considered a problem either.

Another important, objective signifier to lenders is your DTI. You can calculate your DTI by dividing your minimum monthly recurring debt by your monthly income before taxes. The lower your DTI, the more attractive you appear to a lender. For example, let’s say you make $68,400 a year before taxes. Between rent, student loans, auto loans and minimum credit card payments, your monthly debt is $2,100. You’ll divide $2,100 by your monthly income, $5,700, for a strong 37% DTI.

For self-employed borrowers, DTI is yet another reason to keep your business and personal expenses separate on your credit card. If your DTI is more than 50%, your next indicated step will be to lower your monthly expenses or increase revenue before applying for a mortgage. Along with your down payment, your DTI is one of the biggest factors in determining how much mortgage you qualify for.

Document Requirements For A Mortgage Loan When Self-Employed

The exact type of documentation you’ll be asked to provide will depend on your lender, your individual situation and the type of home loan you’re getting. The following sections will go over types of income and employment documentation that are important to self-employed borrowers.

It’s important to note that 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.

Income Documentation

Here are several forms of income documentation you’ll need to make sure you have on hand if you’re self-employed:

  • Personal and business tax returns
  • All schedules related to those returns (for example, Schedules C, E, F, K-1, 1120S, etc.) – which schedules you have will depend on how your business is set up
  • 1099s
  • Profit and loss statements – may or may not have to be audited
  • Balance sheets
  • W-2s (for people with previous experience in the same field)

Employment Verification

The following are examples of valid employment verification if you’re self-employed.

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

People who are working on contract and paid by W-2 can also receive a verbal verification of employment from the employer. In addition to this documentation, your lender will verify that the business is open and operating.

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Loan Options 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. There’s not really an option specifically aimed at those who are their own boss. However, you have several options.

Conventional Loans

Regardless of your employment status, conventional loans are often considered the hardest of the major mortgage options to qualify for because you have to have a higher qualifying credit score and a lower DTI than some other loan options. You need at least a 620 qualifying FICO® Score and for the best chance of qualifying, you want a DTI of 43% or lower.

However, there are a number of big benefits to conventional loans. Sometimes they have lower rates than options under government programs. Additionally, you only need a 3% down payment for a 1-unit primary residence in many cases. Finally, if you make less than a 20% down payment, mortgage insurance comes off once you reach 20% equity.

FHA Loans

FHA loans are backed by the Federal Housing Administration. FHA loans are often a good choice for first-time home buyers since they have less stringent credit requirements compared to conventional loans. You’ll need a 580 median FICO® to get an FHA loan through Rocket Mortgage®. They also allow low down payments of 3.5%.

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.

One thing to note is that if you make the minimum down payment, you have to make monthly mortgage insurance payments for the life of the loan. If your down payment is 10% or more, you make mortgage insurance payments for 11 years. There’s also an upfront mortgage insurance payment of 1.75% of the loan amount for all FHA loans that can be paid at closing or rolled into the loan.

VA Loans

VA loans are backed by the Department of Veterans Affairs and can be a great choice for eligible active-duty-duty servicemembers, reservists, National Guard personnel and eligible surviving spouses. They often feature rates that are among the lowest of any available home loan. But the biggest pro is that there’s no down payment required.

Instead of mortgage insurance, VA loans have a funding fee in the range of 1.4% – 3.6% based on your down payment and whether it’s your first time using a VA loan. VA streamlines have a 0.5% funding fee. There are some funding fee exemptions for disabled veterans, people who have returned to active duty after receiving the Purple Heart and eligible surviving spouses.

USDA Loans

USDA loans allow low- to moderate-income borrowers purchase homes in rural areas without a down payment. To qualify for this specific loan, your income can be no higher than 15% above the median income level of the area. If income is a limitation for you, a USDA loan may be a right fit. It’s also much easier to find USDA eligible homes for sale than you’d think.

Rocket Mortgage doesn’t offer USDA loans at this time.

Tips To Make Your Application Attractive To Lenders

If you’re feeling anxious about your prospects for approval, know that there are several action steps you can take to improve your chances of getting approved.

1. Decrease Your Debt-To-Income Ratio

One of the biggest things you can do to increase your mortgage qualification prospects is to decrease your DTI. There are two ways to do this: increase your income and pay down your debts.

Increasing income is always easier said than done, but entrepreneurs and those who work for themselves are kings and queens of the side hustle. If you have skills that are being unused and the bandwidth to pick up more work, this is one avenue to look at.

The other thing you can do all alone or in tandem with increasing your income is paying down the existing personal debts. The best thing you can do when looking to pay down debt is look for any areas of your budget where you can cut back on your spending. As just one example, think about how many streaming services you pay for vs. the number you actually watch.

Once you have money set aside for paying down your debts, you’re going to want to work toward paying down the items with the biggest monthly payments. A lot of people work toward paying down the debt with the highest interest rate first, which is an excellent strategy if you’re not trying to qualify for a loan at the moment.

However, when qualifying for a loan, you want to pay off the items with the biggest monthly payment so that you can have that room back in your budget for your mortgage.

VA and FHA loans enable borrowers to qualify with DTI ratios of 60% or higher in many cases. However, to give yourself the best chance of qualifying for most mortgage options, you’ll want to keep your DTI around 43% or lower.

2. Increase Your Credit Score

Credit scores and mortgage rates are intertwined for a reason. Taking out a mortgage will likely be the largest debt you incur over your lifetime. Lenders don’t want to risk loaning you hundreds of thousands of dollars if you have a limited or disruptive credit history. To qualify for an FHA loan, for example, you need a credit score of 580 or higher. If you’re not confident in your score, you can work on improving your credit by taking out micro loans and repaying them quickly, paying off old debt and checking for errors on your credit report.

Beyond basic qualification standards, it’s always better to have a higher score. Higher scores mean lower interest rates if you were to have the same down payment.

3. Save For A Higher Down Payment

A higher down payment can make up for the instability perceived by self-employment. Even if your credit score is great, your DTI is well below 50% and business is thriving, a higher down payment will likely unlock even lower interest rates because it means less risk for lenders.

4. Separate Your Business Expenses

Now that you know that mixing business with personal debt can increase your DTI and risk profile, you can work on separating your accounts. Keep your quarterly taxes in a separate account from your down payment savings. The clearer the picture you can give a lender, the more credible you’ll appear.

5. Get A Co-Signer

For many folks, finding a co-signer who is willing to assume full responsibility for the loan if you default may be harder than getting qualified for a loan. That said, if there is that financially responsible someone in your life willing to co-sign a mortgage for you, they may be your ticket to an approved home loan.

At the end of the day, lenders are looking for assurance that their loan will be reliably paid, on time, for the duration of the loan. You could consider buying a home with a friend who is a W-2 employee in order to improve your odds at getting qualified.

The Bottom Line: Get Your Paperwork Ready

If you're self-employed, it's absolutely possible to get a mortgage on your home. It's just easier if you have your documentation ready. Make sure to keep your business and personal expenses carefully separated so as not to impact your DTI. Also be prepared to share both personal and business tax returns as well as all schedules tied to those items. Finally, you'll have to be able to verify employment through documentation.

If you feel you're ready, you can apply online or give us a call at (833) 326-6018.

chart for how to calculate self-employment income for a mortgage

Keep in mind that mortgage lenders only factor taxable income into your mortgage loan amount, which means all those tax write-offs may impact your loan limit for the worse. Say you were making an average of $8,000 per month but were able to write off enough business expenses to only pay taxes on $5,000. Your loan limits will be drastically different.

Most self-employed folks, familiar with the volatility of owning a business, make do with a smaller loan limit. If that’s not an option for you, consider looking into the less regulated bank statement loans, which allow lenders to evaluate 12 – 24 months of bank statements themselves. Expect higher interest rates and a more difficult time finding these types of loans.

Best Home Loans 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. Conventional mortgages aren’t backed by the government and may be more difficult to qualify for. Consider the following options.

FHA Loans

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. They also 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.

VA Loans

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.

USDA Loans

USDA loans allow low- to moderate-income borrowers purchase homes in rural areas. To qualify for this specific loan, your income can be no higher than 15% above the median income level of the area. If income is a limitation for you, a USDA loan may be a right fit. It’s also much easier to find USDA eligible homes for sale than you’d think.

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 Mortgage Loans 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.

While 30-year mortgage rates hit an all-time low in early 2021 at 2.65%, they are slowly starting to creep back up to (still, extremely low) attractive rates. Buying a house during this pandemic can be a good deal if you’ve enjoyed income security during the crisis.

How To Appear More Attractive To Lenders

If you’re feeling anxious about your prospects for approval, know that there are several action steps you can take to improve your chances of getting approved.

Separate Business Expenses

Now that you know that mixing business with personal debt can increase your DTI and risk profile, you can work on separating your accounts. Keep your quarterly taxes in a separate account from your down payment savings. The clearer the picture you can give a lender, the more credible you’ll appear.

Improve Your Credit

Credit scores and mortgage rates are intertwined for a reason. Taking out a mortgage will likely be the largest debt you incur over your lifetime. Lenders don’t want to risk loaning you hundreds of thousands of dollars if you have a limited or disruptive credit history. To qualify for an FHA loan, for example, you need a credit score of 580 or higher. If you’re not confident in your score, you can work on improving your credit by taking out micro loans and repaying them quickly, paying off old debt and checking for errors on your credit report.

Save For A Higher Down Payment

A higher down payment can make up for the instability perceived by self-employment. Even if your credit score is great, your DTI is well below 50% and business is thriving, a higher down payment will likely unlock even lower interest rates. Note that our sister company, Rocket Mortgage®, is not requiring higher down payments as a result of pandemic volatility.

Apply For A Joint Mortgage

At the end of the day, lenders are looking for assurance that their loan will be reliably paid, on time, for the duration of the loan. You could consider buying a home with a friend who is a W-2 employee in order to improve your odds at getting qualified.

Get A Co-Signer

For many folks, finding a co-signer who is willing to assume full responsibility for the loan if you default may be harder than getting qualified for a loan. That said, if there is that financially responsible someone in your life willing to co-sign a mortgage for you, they may be your ticket to an approved home loan.

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.

While you’re crossing your t’s and dotting your i’s, add our first-time home buyer tips to your list of ways to get qualified for a competitive mortgage.

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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.