How to Get a Mortgage if You’re Self-Employed: Full Guide

To get a mortgage when you are self-employed, you need to have a consistent source of income, a good credit score, and a low debt-to-income ratio. Knowing exactly how to get a mortgage if you are self-employed can make or break your dreams of becoming a homeowner, which makes learning about this that much more important.

Securing your desired mortgage rates can be quite challenging when you’re earning money independently, either as a freelancer, a sole proprietor, or a startup owner.

Not to mention, there are also additional key factors to consider, such as other existing loans you may still be paying off. As such, it is crucial to explore all your options and get professional advice to get mortgage deals that align with your finances.

Key Takeaways

• To get a mortgage when self-employed, you need to have a credit score of at least 620, a debt-to-income ratio of 35% or less, and a consistent source of revenue.
• Tax returns, profit and loss statements, business tax records, freelancer pay stubs, and 1099 forms are among the documents that lenders require from self-employed borrowers.
• FHA loans and USDA loans are government-sponsored home loans that suit low to moderate income loan applicants and borrowers with a low credit score.
• You can also increase your chances of getting a mortgage when self-employed by paying a considerable sum for your mortgage down payment.

Can You Apply for a Mortgage if You’re Self-Employed?

Yes, a mortgage is one of the many types of loans people can apply for if they’re self-employed.

Contrary to what people assume, lenders assess your mortgage application in the same manner as they would a W-2 or a full-time employee.

That means mortgage lenders will look into your monthly income, assess your credit score and debt-to-income ratio, and check the amount of time that you have been earning money independently.

Mortgage Eligibility Criteria

The mortgage eligibility criteria for self-employed borrowers are as follows:

• At least two year’s worth of self-employment income. Mortgage lenders typically require at least two years’ worth of self-employment earnings because the said time frame is sufficient to demonstrate a consistent income stream.

• A good credit score. A credit score of at least 620 is ideal if you want to increase your chances of getting your mortgage approved.

How to Get a Mortgage if You’re Self-Employed: 5 Key Steps

The five key steps to get a mortgage if you’re self-employed are listed below, and combined with meeting the mortgage eligibility criteria, they should guide you in choosing the most suitable mortgage loans and rates.

#1. Determine Your Employment Status

The first step is to confirm whether the IRS considers you self-employed or not. Mortgage lenders will often consider sole proprietors, business owners, and 1099 form recipients as self-employed or independent contractors.

You may also be considered self-employed if:

• You earn money mainly by completing one or more independent contractor jobs.

• You’re a landlord who rents out a residential or commercial property.

• You’re part of a partnership where you own at least 25% of the business.

• The majority of your income consists of interests and dividends.

• More than 25% of your regular income is from commissions or bonuses.

• You get paid royalties.

#2. Determine if You Qualify for a Mortgage

Getting a mortgage while self-employed entails researching and comparing self-employed mortgage rates with your average income.

On the other hand, if you have only been freelancing or started a business in the previous two years, there are mortgage loan programs designed for borrowers with low income or low credit scores.

If not, perhaps you should take it as an opportunity to focus on increasing your income by trying other freelance gigs or saving enough money to have a sufficient downpayment for a mortgage.

#3. Gather Proof of Income Documents

To increase your chances of getting a mortgage if you are self-employed, make sure you submit any of the following valid documents that serve as proof of income for a mortgage:

• Individual tax returns.Your individual tax returns can either be your Form 1040, Schedule SE, or other schedules you may need to file based on your income source and tax situation.

• Business tax documents. Examples of business tax documents you can submit for a mortgage application are your Form 1120, Form 1120S, or Schedule K-1 (Form 1065).

• Profit and loss statements. Your profit and loss statementssummarize your expenses and revenue for the current year. Including a self-employment ledger helps provide more information on your quarterly or annual income, expenses, liabilities, and assets.

• Records of your earnings. You can show proof of your income by submitting either your independent contractor pay stub or 1099 forms.

• CPA letter. A CPA letter is an official letter issued by a certified public accountant (CPA). The letter attests that your income and expense statements are correct and compliant with IRS regulations.

Providing complete documentation allows lenders to verify your income and gives them more insight into your qualifications for your desired loan amount.

Depending on your source of earnings, you might also have to provide more than one type of self-employed proof of income to increase your chances of getting approved for a mortgage loan.

Here’s a convenient and practical tip: Opt for user-friendly online tools such as Paystub.org’s paystub generator. Creating pay stubs to prove your income is ideal if you have several freelancing gigs and need to track your earnings in a more organized manner.

Our generator has ready-made templates that you can easily fill out with the necessary information about your earnings. The templates also have a section where you can provide additional information about your taxes and a built-in calculator for a seamless calculation of your net and gross income.

#4. Figure Out How Much of Your Income Qualifies

Mortgage lenders don’t just focus on how much you make as a freelancer, business owner, or independent contractor. They also look into whether your income source exhibits long-term profitability or not.

Take a moment to assess the nature of your income and check whether it enables you to get a mortgage while self-employed.

Most lenders will consider freelancing income, business revenue, and investment earnings from self-employed borrowers.

However, they may also allow other forms or sources of income, such as alimony, child support payments, disability benefits, and other financial aid from the government.

#5. Research Multiple Lender Options

Mortgage lenders differ depending on the type of financial services and products they can offer. Some of the most common types of lenders you may encounter include:

• Direct lender. A direct lender works directly with borrowers to fund their mortgage. Unlike banks, they offer more competitive mortgage rates and a straightforward loan process.

• Portfolio lender. Portfolio lenders have their own criteria for assessing a borrower’s mortgage loan eligibility. They also have specific loan payment terms that are more flexible compared to banks and other mortgage lenders.

• Hard money lender. Just like portfolio lenders, hard money lenders also provide flexible mortgage loans. However, their approach is often non-traditional, and their short repayment conditions also come at a higher cost.

• Warehouse lender. Compared to direct lenders, warehouse lenders do not work directly with their clients or borrowers. They usually offer short-term funding to other lenders.

• Mortgage banker. This type of mortgage lender funds loans by borrowing money from a warehouse lender. They then sell the loan to an investor. They may also assess, approve, and fund applications for mortgages and other types of loans.

Here’s a pro tip: Consider working with a mortgage broker who has experience getting mortgage deals for self-employed individuals. In this manner, you get assurance that your specific financial situation and preferred mortgage rates are prioritized.

4 Effective Ways to Boost Your Chances of Getting a Mortgage if You’re Self-Employed

To increase your chances of getting a mortgage if you’re self-employed, you must not have any outstanding debt and have a good credit score. There are also other tested and proven ways to boost your mortgage approval, such as:

#1. Lower Your Debt to Income Ratio

Your debt-to-income (DTI) ratio is your total monthly debts or loan payments divided by your gross monthly earnings. A good DTI ratio should be at 35% or less.

This means that your existing loans are kept at manageable rates, considering your average income. Some ways you can lower your debt-to-income ratio include paying down your debt to avoid incurring penalties or additional interest.

You can also take out a single loan to pay off all other existing debts or create a pay stub budget to monitor your expenses based on your average income and gradually repay your outstanding loans.

#2. Increase Your Credit Score

Your credit score reflects your capability to repay loans and adhere to the loan’s payment terms consistently and without fail. The key to building your credit score is to borrow money within your means and ensure you pay your debts on time.

Exhibiting responsibility in handling money, particularly when it comes to borrowing money and regulating your expenses, increases your chances of getting a mortgage while self-employed.

At the same time, a high credit score enables you to secure better mortgage rates with lower interest rates.

#3. Make a Large Down Payment

The goal of preparing your deposit or down payment for your mortgage is to reduce your loan-to-value ratio. A mortgage’s loan-to-value ratio measures the gap between the home or property value and the amount you want to loan.

Maximizing your deposit is also ideal if you have only been earning money independently for one year or less.

That said, a mortgage deposit of at least 20% is a good starting rate. The higher your deposit, the more likely you are to get excellent interest rate options. At the same time, you reduce the probability of paying mortgage insurance.

#4. Find a Suitable Mortgage Loan

There are several mortgage loan options worth looking into. Here are some examples of mortgage loans that are suitable for freelancers and sole proprietors alike:

• FHA loans. Federal Housing Administration (FHA) loans best suit borrowers with low credit scores or those who do not qualify for conventional loans. This type of loan is also ideal for first-time home buyers due to its flexible requirements.

• Conventional loans. Conventional loans are not sponsored or backed by any government agency. This type of loan often requires at least two years of self-employment experience or history, at least a 3% down payment, and a 43% DTI ratio.

• USDA loans. USDA loans are offered by the U.S. Department of Agriculture to low to moderate-income families in rural or suburban areas. If you have been self-employed for only a year or cannot afford conventional mortgage rates, consider applying for a USDA loan program.

What to Do if You Don’t Qualify for a Mortgage

The first thing you must do if you don’t qualify for a mortgage is to ask the lender why your application was declined. Getting a mortgage while self-employed means encountering multiple rejections along the way.

However, rejected mortgage applications shouldn’t stop you from securing your desired mortgage rates.

Some lenders reject self-employed borrowers who do not have a consistent income source.

In other cases, the lender may have found that you recently made late repayments on an existing loan.

Regardless, you must always take notes and prioritize addressing and resolving the issue to increase your chances of qualifying for a mortgage the next time you submit an application.

It would also be wise to stay vigilant and protect yourself against mortgage scams. Mortgage scams (or mortgage fraud) are the intentional fabrication of one’s documents and details on their mortgage application.

Some fraudsters engage in mortgage scams in an attempt to acquire housing or retain ownership of their property.

Other fraudsters are insiders who work in banks and financial institutions or even mortgage brokers themselves who manipulate the mortgage approval process and try to exploit money from unsuspecting clients and borrowers.

That said, you should be extra careful before agreeing to do business with a mortgage broker or a lender. If needed, try to find reviews about their services and rates online to verify the authenticity of their services.

Final Thoughts

Now that you know how to get a mortgage when self-employed, you should focus on exploring your options in terms of finding the best type of mortgage loan and lender that adheres to your preferences.

If you feel that you are not yet financially stable enough to afford a mortgage, then draft a detailed plan or timeline to help manage your expenses accordingly and save enough money for a home loan in the near future.

Better yet, check out our blog for more insightful tips on how to manage your income effectively!

How to Get Mortgage if Self-Employed FAQ

#1. How do self-employed people show proof of income?

Self-employed people can show proof of income by providing copies of their pay stubs from the last three to four months, tax returns, and bank statements.

#2. How long do you need to be self-employed to get a mortgage?

Typically, you’d need to be self-employed for at least two to three years to increase your chances of getting a mortgage. However, you can still potentially get a mortgage even if you’ve been self-employed for less than the ideal time frame.

#3. How to find the best mortgage deals if you’re self-employed?

The key to finding the best mortgage deals if you’re self-employed is to seek guidance from a mortgage broker or advisor. Another option is to conduct thorough research about the different mortgage rates that suit your budget.

#4. How does a lender calculate self-employment income for a mortgage?

A lender calculates self-employment income for mortgage loans by assessing the borrower’s take-home pay or net earnings, two years’ worth of tax returns, and other proof of income.