How to get a mortgage when you’re self-employed

You don’t have to earn traditional W-2 income to obtain a mortgage. In fact, many mortgage lenders work with borrowers who are contract or gig workers, consultants and freelancers. Some mortgage brokers even specialize in these types of clients. Here’s what to know about applying for a mortgage as a self-employed borrower.

Can you qualify for a mortgage while self-employed?

Yes, it’s possible to qualify for a mortgage while self-employed. It’s actually a common misconception that self-employed borrowers have a harder time getting approved, says Paul Buege, operations officer at Guild Mortgage in Menomonee Falls, Wisconsin.

“In all cases, the basic criteria to get approved are the same: You need to have a good credit history, sufficient liquid available assets and a history of stable employment,” Buege says.

There is often additional scrutiny in underwriting, however, and some challenges can crop up if you’ve only been working for yourself for a short time or make less money than lenders prefer — even if it’s just on paper.

“Self-employed individuals often take full advantage of the legal tax deductions and write-offs that are allowed by the IRS,” says Eric Jeanette, CEO of Dream Home Financing, based in Adelphia, New Jersey. “Unfortunately, this means that they often show a low net income — or even a loss — on their tax returns. That can make it tougher to qualify for a mortgage.”

5 steps to get a mortgage when self-employed

If you’re self-employed, the mortgage application process is similar to that of a W-2 borrower, but with some additional documentation requirements to verify your income and business standing. Here’s an overview:

1. Understand whether you classify as self-employed

If a large portion of your earned income is verified by 1099 forms, rather than W-2s, you’re likely to be considered self-employed. The same goes if your tax return includes Schedule C, which applies to sole proprietors. You might also be classified as self-employed if:

• You run a business as an independent contractor.
• You are part of a partnership that runs a trade or a business.
• You are a gig worker or run a part-time business that accounts for most of your income.

Even when you have a second, part-time job with a W-2, a lender will likely place more weight on your own gig if it’s your primary income source.

2. Keep business expenses separate from personal

It’s crucial to keep your business expenses in accounts separate from your personal spending. (This is good practice whether applying for a mortgage or not.) This differentiation helps your mortgage lender understand your finances as it verifies your ability to repay the loan.

3. Document self-employment income

Just as it would for a W-2 worker, your mortgage lender will require proof of income when you apply for a loan or preapproval. This might involve providing more paperwork, however, says Alan Rosenbaum, founder and CEO of GuardHill Financial Corp. in New York City. The document requirements might include:

4. Prepare to explain your business

Depending on the nature of your work, you might need to provide your lender with additional details about your business, such as:

• Description of the services you provide and your experience, including certifications
• Your professional website
• Data showing the health of the industry and demand for your services
• Tax returns from previous years, especially if they show growth in revenue over time
• Explanations of any revenue gaps
• Ongoing contracts you have with clients, especially if you’re on retainer
• A business plan, if you have one

5. Shop around for lenders

Many mortgage lenders work with self-employed borrowers, but there are some with more experience. To find the best fit, read reviews and shop rates. If you’re not sure where to start, a mortgage broker might be able to connect you with lenders who specialize in self-employed applications.

“Work with an experienced loan officer who understands self-employed business records and documentation,” Buege says. “This person can help you present your business earnings and liabilities in a clear and understandable way that facilitates the approval process.”

Mortgage types for self-employed borrowers

Self-employed borrowers are often eligible for the same mortgage types available to others. That means you might qualify for a conventional or government-backed loan or both. Here’s a closer look at each:

• Conventional mortgages: These are the most common type of mortgage. They require a minimum 3 percent down payment and a credit score of at least 620.
• FHA mortgages: FHA loans are insured by the Federal Housing Administration, but offered by private lenders including banks and online lenders. They require a 3.5 percent down payment with a credit score of at least 580.
• VA mortgages: VA loans are available to qualifying active-duty service members, veterans and surviving spouses. These loans don’t require a down payment in most cases.
• Non-qualified mortgages: A non-qualified mortgage (non-QM) doesn’t adhere to federal requirements for qualified mortgages, meaning it has more flexibility in underwriting and might have a unique loan structure. One example of a non-QM loan is a bank statement loan.

Tips to improve your chances as a self-employed borrower

There are several ways to increase your odds of getting approved for a mortgage as a self-employed borrower, including:

• Improve your credit score: If your credit needs work, take steps to pay bills on time, pay down debt and correct any errors on your credit reports, such as inaccurate contact information or accounts. Aim to do this well in advance of applying for a mortgage, since it can take some time to raise your score.
• Lower your debt-to-income (DTI) ratio: The lower your DTI, the better your chances of getting approved and the better your loan terms. You can lower your debt ratio by paying down or paying off debt balances on installment loans and increasing your income if possible.
• Make a larger down payment: A higher down payment increases your odds of approval and means you’ll borrow less and pay less in the long run. Aside from savings, consider whether you can obtain gift funds from family and explore down payment assistance programs.
• Consider a co-borrower or co-signer: If your self-employment income isn’t sufficient to qualify for a loan, adding a co-borrower or co-signer might help. Keep in mind that a co-borrower typically has an ownership stake in the property, which can complicate matters when it comes time to sell.

What if I don’t qualify for a traditional mortgage?

If you don’t get approved for a traditional mortgage like a conventional loan, you can try applying for a non-QM loan, though “these often come at a higher cost to the consumer, and not everyone can qualify.”

If you’re trying to refinance and get denied, you could try applying for a home equity loan or home equity line of credit (HELOC) if you’ve built up enough equity in your property and otherwise meet the qualifications.

FAQ

• Can you get a mortgage if you’ve been self-employed for less than two years?

  Depending on the mortgage lender, you might be able to get a loan with less than two years of self-employment history. If you’ve become self-employed in an industry where you’ve previously worked, for example, you can show continuity of career, even if you’ve been self-employed for less than two years.

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

  Mortgage lenders typically look at the self-employed borrower’s gross personal income and net business income. Your loan officer can help you understand how to document both types of income for a mortgage application.

• Is it difficult to get a mortgage when you’re self-employed?

  Generally, if your credit, debt and income meet the mortgage lender’s requirements, it’s no more difficult to qualify for a mortgage compared to qualifying as a W-2 worker. That said, you might have to navigate more paperwork, answer more requests for additional documentation or otherwise explain your business in more detail during underwriting.