How to Get a Mortgage When You’re Self Employed

Qualifying for a self-employed mortgage in 2024: a step-by-step guide

Being self-employed doesn’t mean you can’t qualify for a mortgage.

You have access to the same home loan programs as traditionally-employed borrowers, though you may face additional scrutiny when documenting your income. With the right preparation and knowledge, you can navigate the self-employed mortgage process successfully.

In this article (Skip to...)

• Mortgage for self employed
• How to get a self-employed loan
• Self-employed mortgage loans
• FAQ

Is it possible to get a mortgage while self-employed?

Absolutely, being self-employed does not automatically disqualify you from obtaining a mortgage.

In fact, there are various types of mortgages for self-employed individuals designed specifically to meet their unique personal finance needs. While obtaining a self-employed mortgage loan may require a bit more documentation and underwriting scrutiny, it’s certainly possible.

Self-employed home loans could also require more substantial cash reserves or a larger down payment to offset the lender’s risk, given that self-employed income can sometimes be inconsistent.

For the most favorable mortgage terms, it’s recommended to work with lenders who specialize in catering to self-employed individuals. These financial institutions often have more experience and flexibility in dealing with income that may not be as steady as that of a W-2 employee.

How to get a self-employed mortgage: Step by step

Although obtaining a mortgage as a self-employed person can seem overwhelming, the process can be easier to handle if you break it down into manageable steps. Here’s what you should know about qualifying for self-employed mortgages.

Step 1: Determine if you’re considered self employed

For mortgage loans, you’re considered self-employed if you own 25% or more of a business, receive 1099 income for services rendered, or your income is documented in the Schedule C part of your personal tax returns. This includes:

• Sole proprietors, freelancers, and contract workers: You are the sole owner of an unincorporated business.
• Partnerships: You share ownership of a business with one or more partners.
• Limited Liability Companies (LLCs): You have an ownership stake in a business that offers personal liability protection.
• Corporations: You own shares in a legal entity separate from its owners.

Lenders will generally consider any source of steady income that is stable, consistent, and ongoing when assessing business owners for a self-employed mortgage.

These types of income can be considered independently or as additional funds on top of a primary income source. Lenders will sometimes even count unemployment income for contract or seasonal workers with a regular, documented history of receiving unemployment in the off-season.

For any sources of income, your loan officer must determine whether it will be “ongoing.” Generally, the income must seem likely to continue for at least three years after the loan closing. So your business prospects need to look good. A history of declining income will not improve your chances of qualifying for a mortgage.

Step 2: Meet self-employment mortgage requirements

As a self-employed home buyer, you’ll need to meet the following requirements to qualify for a mortgage:

• Credit score: Lenders typically require a credit score of 620 or higher. Maintain a good credit history and address any issues before applying.
• Debt-to-income ratio: Your debt-to-income ratio (DTI) should be below 43%. This ratio compares your monthly debt obligations to your monthly income. A lower ratio demonstrates your ability to manage debt and makes you a more attractive borrower.
• Stable income and cash flow: Lenders want to see that your business generates consistent income to cover your mortgage payments. Generally, they require a history of stable self-employment income for at least two years.
• Down payment: The down payment requirements for self-employed borrowers are similar to those for traditional borrowers. Depending on the loan type, you may need to put down as little as 3% (conventional loans) or 3.5% (FHA loans).
• Additional savings: Some lenders may require self-employed borrowers to have cash reserves to cover mortgage payments in case of business downturns. The amount varies but typically ranges from 6 to 12 months’ worth of mortgage payments.

Step 3: Gather financial documents and proof of income

To prove your income and qualify for a self-employed mortgage, you’ll need to provide the following documents:

• Tax returns: Provide 1-2 years of personal and business tax returns, including all schedules and attachments. This includes:
  • 1099 forms for independent contractors or freelancers
  • Schedule C (profit or loss from business) for sole proprietorships
  • K-1 statements for partnerships
• Profit and loss statements and balance sheets: These financial statements provide a detailed breakdown of your business income, expenses, assets, and liabilities.
• Bank statements: Provide 12-24 months of personal and business bank statements to demonstrate your cash flow and financial management.
• Business license and client contracts (if applicable): These documents help demonstrate the legitimacy and stability of your business.

Organize these documents and be ready to provide additional documentation from the IRS if requested by the lender. The more organized and transparent you are about your finances, the smoother the mortgage loan application process will be.

Dealing with income inconsistencies

If your self-employment income fluctuates from year to year, lenders will generally use a 2-year average to calculate your qualifying income. Be prepared to explain any significant changes in income, such as:

• Business investments or expansions
• Economic factors affecting your industry
• Changes in clientele or contracts

“Loan officers will use the worst-case scenario,” says John Meyer, loan expert and licensed MLO. “So if you made less in the most recent year, we will use a 12-month average, and if increasing year-over-year, then a 2-year average.”

Working with a Certified Public Accountant (CPA) can help you organize your finances and present them in the best light to mortgage lenders.

Step 4: Understand how lenders calculate self-employed income for a mortgage

Mortgage lenders typically use your net income (after deducting business expenses) to calculate your taxable income. They will determine if you have enough income to qualify for a mortgage by averaging your net income over 1-2 years based on your tax returns.

To calculate your net income, lenders will:

• Review your tax returns (1040) and find your total income on line 9.
• Subtract any W-2 income (if applicable) to determine your self-employment income.
• Add back certain deductions such as depreciation or depletion (Schedule C, line 13).
• Subtract other non-recurring losses or expenses to determine your adjusted gross income.
• Average your adjusted gross income over the past 1-2 years to determine your qualifying income.

Some lenders may use a “gross income” approach, adding back certain write-offs like depreciation to better reflect your true taxable income. Depreciation is a paper loss that doesn’t affect your actual cash flow. By adding it back, lenders can get a more accurate picture of your small business’s profitability.

For instance, say you earn $6,000 a month. But after deductions, your taxable income is only $4,000 per month. Here’s how your home buying budget changes:

*Example assumes a maximum debt-to-income ratio of 36%

In this example, losing $2,000 off your monthly income reduces your home buying budget by more than $150,000.

Do I have to report self-employed income?

Fannie Mae and Freddie Mac say that for conventional loans, self-employed income does not need to be reported if it’s not used to qualify for the mortgage.

In other words, if you can qualify based on W-2 income and personal savings alone — not using funds in a business account — then your lender can ignore the self-employment income and you don’t need to document it.

This provision also applies to borrowers living off of retirement income, social security income, pension payments, or investments and dividends. Note that these rules apply to conforming home loans. Guidelines for other types of loans may be different.

Step 5: Compare loan options and shop for the best self-employed mortgage lenders

When shopping for a self-employed mortgage, look for lenders experienced with self-employment income, including non-qualified mortgage (QM) lenders.

Non-QM lenders offer mortgage loans that don’t conform to traditional lending guidelines, making them a great option for self-employed individuals with unique financial situations.

To find the best lender for your needs:

1. Research lenders online and read reviews from other self-employed borrowers.
2. Ask for recommendations from friends, family, or colleagues who have gone through the process.
3. Contact multiple lenders and ask about their experience with self-employed borrowers, loan options, and requirements.
4. Compare mortgage rates, fees, closing costs, and terms from at least 3-5 lenders before making a decision.

Working with a mortgage broker who understands the unique challenges of self-employed borrowers can also help streamline the mortgage process, from pre-approval to closing on your self-employed home loan.

Self-employed mortgage loan options

Self-employed borrowers are eligible for all of the major mortgage programs, including conforming loans (backed by Fannie Mae and Freddie Mac) and government-backed FHA, VA, and USDA loans.

Briefly, here’s how your loan options compare.

Bank statement loans

Bank statement loans are a non-QM mortgage option that allows business owners and self-employed borrowers to qualify based on their cash flow rather than tax returns. Lenders assess income by examining 12-24 months of personal and business bank statements to determine an average monthly income. This can be advantageous for borrowers who may have high expenses on their tax returns, reducing their taxable income.

“Bank statement loans can be useful for buyers who don’t have 1-2 years of returns to verify income,” says Meyer.

To qualify for a bank statement loan, borrowers typically need:

• 12-24 months of personal and/or business bank statements
• 620-680 minimum credit score (varies by lender)
• 10-20% down payment
• Debt-to-income ratio below 50%

Bank statement loans can provide a path to homeownership for self-employed individuals who might not qualify for conventional mortgages. However, they come with some drawbacks, including higher interest rates, and their non-QM status means fewer consumer protections.

For example, a self-employed consultant earning $8,000 per month might only show $5,000 in taxable income on their returns due to business expenses. A bank statement loan could help them qualify based on their actual $8,000 cash flow, increasing their purchasing power.

Conventional loans

Also known as conforming loans, conventional loans are mortgages eligible for purchase by Fannie Mae or Freddie Mac. The majority of U.S. mortgages are conforming loans.

Fannie Mae and Freddie Mac will qualify self-employed borrowers after at least two years of self-employment or with at least one year of self-employment, plus a documented history of at least two years earning comparable income in a comparable role. This demonstrates a solid track record to lenders.

Aside from these guidelines, conforming loans require the following:

• 620 minimum credit score
• 3% minimum down payment
• Debt-to-income ratio below 45%, in most cases
• Loan amount within conforming loan limits

If your credit report reveals good credit and you have a moderate to large down payment (10–20%), a conventional self-employed mortgage is often the most affordable option.

Home buyers who put at least 20% down can avoid private mortgage insurance (PMI) on these loans. The same goes for homeowners who refinance with at least 20% home equity. Avoiding PMI can be a significant saving when compared to an FHA mortgage.

FHA loans

The Federal Housing Administration insures FHA mortgages, which can be an attractive option for business owners seeking a self-employed mortgage. This type of mortgage is often best for low-credit and first-time home buyers due to their lenient requirements.

To qualify for FHA financing, you need only:

• 580 credit score or higher
• 3.5% down payment
• DTI below 50% (varies by lender)
• Plan to use the property as your primary residence
• Loan amount within current FHA loan limits

For self-employed borrowers, FHA also requires a two-year self-employment history or one year of self-employment plus two years in a related role with similar income. If you have one year in a similar role and one year of formal training or education, FHA may count this as an acceptable two-year history.

The FHA typically requires two years of personal and business tax returns to document self-employment income.

However, you may not have to show business tax returns if:

• Your personal returns show increasing income over the past two years
• Down payment and closing costs are not coming from a business account
• Your loan is not a cash-out refinance

VA loans

VA loans, guaranteed by the Department of Veterans Affairs, are meant for veterans, service members, and some surviving spouses. They have below-market interest rates and no ongoing mortgage insurance.

Requirements for VA mortgages are also fairly lenient. As a self-employed borrower, you’ll need at least two years in your current role, or one year of self-employment plus a two-year related work history.

Other requirements include:

• 580–620 credit score (varies by lender)
• 0% down payment
• Eligible service history

A VA mortgage should always be the first stop if you’re eligible, since it’s typically the lowest-cost home loan on the market.

USDA loans

USDA loans are mortgages guaranteed by the U.S. Department of Agriculture. These home loans require no down payment and tend to have below-market rates.

To qualify for USDA financing, you must have a low-to-moderate income and live in a qualified “rural area.” Self-employed applicants need a two-year history in their current role, or at least one year of self-employment and two prior years in a related position.

Other requirements for a USDA mortgage include the following:

• 640 credit score or higher
• 0% down payment
• Income is no higher than 15% above the area median
• Property is a single-family residence
• You use a 30-year, fixed-rate mortgage

The rural requirement for a USDA mortgage might sound restrictive. But most of the U.S. landmass qualifies as rural under the USDA’s definition. So if this type of mortgage appeals to you, it’s worth asking a lender whether you and your home qualify.

FAQ: Self-employed mortgage loans

Today’s self-employed mortgage rates

Buying a home or refinancing when you’re self-employed might not be as difficult as you think.

Self-employed people have access to the same mortgage programs and interest rates as other borrowers in today’s real estate market. But it’s up to you to shop around for the best self-employed mortgage loan program and lender that suits your needs.

Comparing at least three mortgage offers will help you find the lowest mortgage rate and best terms possible. You can begin the process today by clicking on the links below.