What is the best mortgage program for a self-employed borrower with a low credit score?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

Getting a mortgage if you are self-employed can be challenging. Lenders usually require extra documentation and you may be required to have a longer employment history to qualify for the loan.

In addition, instead of using your current monthly income to determine the mortgage you can afford, for self-employed applicants lenders typically average your income over the prior two years. If your income has increased during that time period, you may be at a disadvantage and qualify for a smaller mortgage amount.

The mortgage approval process for self-employed borrowers can be even more difficult if you have a low credit score. Depending on your specific score, your mortgage rate may be higher or you may be ineligible for certain loan programs. A higher mortgage rate increases your monthly payment and reduces the loan amount you qualify for.

Review How to Get a Mortgage If You Are Self-Employed

In light of these potential challenges, the best mortgage program for self-employed borrowers with a low credit score is the FHA mortgage program. First, you can qualify for an FHA loan with a credit score as low as 500 if you make a down payment of at least 10% of the property purchase price. If your down payment is between 3.5% and 10%, the minimum credit score required is 580.

This lower FHA mortgage credit score requirement applies regardless of what type of job you have, including if you are self-employed. Plus, the required score is lower than for conventional mortgage programs.

Review our FHA Mortgage Guide

Another benefit of the FHA mortgage program for self-employed applicants is that you typically pay a lower mortgage rate, regardless of your credit score or type of employment. FHA mortgage rates are lower because the program is insured by the federal government, which reduces the risk for lenders. This also means that a borrower with a score of 580 should pay the same rate as a borrower with a score of 720.

The table below shows mortgage rates and fees for FHA lenders in your area. We recommend that you contact multiple lenders to find the best FHA loan terms for self-employed borrowers.

The FHA mortgage program may also require a shorter work history for self-employed applicants as compared to other loan programs. Similar to other programs, you are usually required to be self-employed for at least two years to get approved but the FHA program also allows a job history of one-to-two years if you previously worked in a similar field for at least two years.

Additionally, a combination of one year of employment in a similar line of work plus one year of education in that industry is also allowed for self-employed applicants. Requiring a shorter history of self-employment may make it easier for you to qualify for a mortgage.

Use our FHA MORTGAGE QUALIFICATION CALCULATOR to determine the loan you can afford

The main drawback of an FHA mortgage is that you are required to pay an upfront and monthly mortgage insurance premium (MIP), which increases your closing costs and monthly payment. The amount of MIP depends on your mortgage amount, down payment and the length of your loan but you do not pay higher fees because you are self-employed.

Please note that the monthly FHA mortgage insurance is non-cancellable in almost all cases which means you are required to pay it as long as you have your mortgage.

Another factor to consider is that the FHA program applies loan limits which place a cap on your mortgage amount. The loan loan limits are usually only an issue if you want to buy a higher priced property.

Despite these considerations, the positives of the FHA program usually outweigh the negatives. If you are a self-employed borrower with credit challenges we recommend that you learn more about how an FHA mortgage can help you buy a home.

Sources

"II.A.4.c.x. Self-Employment Income (TOTAL)."  FHA Single Family Housing Policy Handbook 4000.1.  Federal Housing Administration, January 2 2020.  Web.

"II.A.1.b.ii.(A).(3) Borrower Minimum Decision Credit Score."  FHA Single Family Housing Policy Handbook 4000.1.  Federal Housing Administration, January 2 2020.  Web.