When you work for yourself, getting a mortgage can seem intimidating. Lenders have stricter eligibility requirements for the self-employed to ensure you have the income needed to repay the loan. However, there are still plenty of financing options available if you know what to expect and come prepared.
What Lenders Look For
Lenders want assurance that your self-employment income is stable enough to make regular mortgage payments. To qualify, you'll likely need:
Two years of steady self-employment income
Personal and business tax returns
1099 forms and financial statements
Your personal credit score and history also play a big role in the approval process. Those with scores below 620 may not qualify for a conventional mortgage.
To confirm your income, self-employed borrowers should have the following paperwork ready:
Federal tax returns - Minimum 2 years, personal and business
Profit and loss statements
Business bank statements
Lenders will analyze your gross income, expenses, and net profit to determine home loan eligibility. Keep detailed financial records so you can easily supply needed documentation.
Types of Mortgages for the Self-Employed
You'll have several home loan programs to choose from, including:
Conventional mortgages offered by private lenders are a popular choice but usually require a 10-20% down payment and higher credit scores.
Insured by the Federal Housing Administration, FHA loans only need 3.5% down and have flexible credit guidelines. These help offset the risk of lending to self-employed borrowers.
Veterans Affairs mortgages provide 0% down payment options and limited income documentation for qualifying veterans and military members.
For properties in suburban or rural areas, USDA loans offer no down payment mortgages for low-to-moderate income borrowers, including the self-employed.
Those requiring financing above conventional limits may quality for a portfolio jumbo loan from a bank. However, larger down payments are usually expected.
Self-Employed Mortgage Requirements
To qualify for financing as a self-employed borrower, there are a few common benchmarks you'll need to meet:
Minimum 12-24 months self-employment
Personal credit score 620+
Lower debt-to-income ratio
Sufficient assets and reserves
Stable gross annual income
What's Considered for Your Income?
As your own boss, how do lenders calculate work earnings? Common sources include:
Income listed on your personal tax returns
Salary or owner's draw payments
Dividends and distribution payments
Additional factors like housing trends, industry projections, and length of self-employment may support your income qualifications too.
The amount an entrepreneur can borrow varies case-by-case based on your:
As a rule of thumb, you want to spend less than 28% of gross monthly income on your mortgage payment. This includes principal, interest, taxes, insurance, and any HOA fees.
By calculating your debt-to-income ratio and following lending standards, you can estimate the maximum home loan size you may qualify for.
Getting the Best Self-Employed Mortgage Rates
As an entrepreneur, you can take a few steps to secure lower mortgage rates:
Put at least 10-20% down
Ask about "independent income verification"
Highlight steady earnings and revenue growth
Maintain low debt and high credit scores
Bring strong reserves - ideally 12+ months
Shop and compare multiple loan offers
Coming prepared with adequate assets and operating capital makes lenders more confident in your ability to handle mortgage payments long-term.
Steps to Improve Mortgage Chances
If your self-employment status is making you ineligible now, a few changes can significantly improve your mortgage qualifications:
Pay down existing debts
Increase your cash reserves
Build more years in business
Show consistent 1099/tax form income
Incorporate your venture
Open a business credit profile
Meeting more conventional lending guidelines helps ease a lender's doubts when reviewing a self-employed borrower.
Even a 12-24 stretch of on-time vendor payments, reliable customers, infrastructure investments or staff growth can demonstrate the long-term viability of your business.
Self-Employed? Get Financing Tips from the Experts
As an entrepreneur, you have unique obstacles qualifying for home financing. But with proper preparation, you can show lenders the stability of self-employment income and secure a mortgage.
Connect with a loan officer experienced in working with borrowers like you. Ask questions to learn what documents your lender requires, how they calculate income qualifications, and what self-employed mortgage programs exist.
Come ready with multiple years of clean tax returns, profit and loss statements, W2/1099 forms, and personal financial statements. Highlight steady earnings and healthy business growth over time.
Today's lending environment provides many options for the self-employed. With guidance from professionals, creativity, and a commitment to transparency, you can achieve the dream of homeownership.