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How to Get a Mortgage if You Are Self-Employed

How to Get a Mortgage if You Are Self-Employed

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience
Getting a mortgage if you are self-employed is more challenging than if you are employed as a regular salaried or hourly worker.  This is because self-employed applicants are believed to be higher risk borrowers, so lenders apply stricter mortgage qualification guidelines.  In short, self-employed borrowers are usually required to have a longer track record of employment and must provide additional documents to verify their income.  Lenders also apply a higher degree of scrutiny to self-employed income and may discount your earnings depending on monthly fluctuations and how long you have been self-employed.

It is important to highlight that the definition of a self-employed borrower is relatively broad and usually includes anyone who does not receive a W-2 from their employer.  Small business owners and independent contractors are usually classified as self-employed when you apply for a mortgage.  For example, if you receive a 1099 tax form to document your income, then chances are mortgage lenders consider you to be self-employed. 

While it may be more difficult to qualify for a mortgage if you are self-employed it is certainly not impossible.  Applicants who prepare their personal and financial documents before they apply for a mortgage and understand how lenders approach self-employed borrowers are better positioned to get approved for a mortgage.  Applicants who expect the process to be the same for them as it is for other borrowers may be frustrated by the process or even worse, may not qualify for the loan.  

Below we outline how to get a mortgage if you are self-employed including qualification requirements and the documents you must provide to lenders such as tax returns and bank statements.  We also review how lenders calculate income for self-employed borrowers, which determines what size mortgage you can afford.  You may earn a good income but the lender may use a different earnings figure to calculate the loan amount you qualify for.  Continue reading to learn more about the application process and understand the mortgage options available to self-employed borrowers.
1

Employment History and Documents Required

Lenders typically require that self-employed borrowers provide federal tax returns for a minimum of two years to qualify for the lowest mortgage rate offered by the lender. A job history of between one and two years may be permitted if the applicant was previously employed in a similar line of work and earns a similar or greater income as evidenced by the borrower's tax returns.  Additionally, in certain cases for borrowers with stronger credit profiles, some lenders may only require a tax return for the most recent year.  Also, some lenders may only require a tax return for one year, but may charge a higher rate and lender costs.  Depending on your circumstances, lenders usually require the following documentation for self-employed mortgage applicants:

Twelve months of bank statements to confirm the borrower’s monthly income

Two years of Schedule C filings (typically applicable for self-employed sole proprietors)

Two years of corporate tax returns if the borrower is a 50.1% partner or shareholder in a limited partnership or corporation

Many self-employed borrowers that own a business utilize a Chapter S corporate tax structure whereby the corporation is not required to pay taxes and all profits are passed through to the proprietor. In this case, the lender will review the borrower’s income as reported on his or her 1040

If applicable, the lender may also require the borrower to provide a Schedule K-1 (Form 1065) to verify income from limited partnerships

Review our Mortgage Checklist for Self-Employed Borrowers

Qualification requirements for self-employed borrowers also vary by mortgage program. The VA Home Loan Program applies relatively strict guidelines that typically require two years of employment history for self-employed applicants while FHA Mortgage Program guidelines permit an employment history of between one and two years "if the borrower was previously employed in the same line of work in which the borrower is self-employed or in a related occupation for at least two years." So in short, if your self-employed job is in the same field in which you previously worked, then you may be able to qualify for the FHA Mortgage Program with only one year of tax returns and employment history.

Understand the Job History Requirement for a Mortgage

2

Understand How Lenders Calculate Income for Self-Employed Applicants

Many self-employed borrowers expect lenders to look at their most recent month of income to determine the borrower's ability to qualify for a mortgage and what size mortgage they can afford.  Instead of looking at a self-employed borrower’s most recent month of income, lenders typcially use the average of the borrower's last two years of income as reported on his or her tax returns.

For example, if a self employed borrower earned $100,000 in income last year and $50,000 in income the year before that, the lender will divide the sum of the two income figures by 24 to determine the monthly income the lender will use to assess the borrower’s ability to qualify for the mortgage. In this example, $100,000 + $50,000 = $150,000 / 24 months = $6,250 in monthly gross income for the borrower, which is significantly lower than the applicant's average income for the past year.

Use our Mortgage Qualification Calculator to determine what size loan you can afford based on your monthly gross income and debt expense

If a self-employed borrower's income has increased over the past couple of years, he or she may currently be currently making significantly more in monthly income than the earnings figure used by the lender, which may come as a surprise to the borrower and limit the borrower’s ability to qualify for the mortgage.

3

Consider a Bank Statement Mortgage

With a bank statement mortgage the borrower provides monthly bank statements instead of their tax returns, W-2s or pay stubs to verify their monthly income.   In some cases borrowers also may be required to provide a profit and loss (P&L) statement for their business as prepared by a tax professional.  Depending on the borrower's situation and type of self-employment, you may be required to provide both personal and business bank statements to the lender.  In short, the lender uses the bank statements instead of standard tax or income documents to qualify you for the loan and determine what size mortgage you can afford.

Review our comprehensive Bank Statement Mortgage Guide

Bank statement mortgages are good for self-employed applicants because they typically do not have W-2s or pay stubs plus their tax returns may not accurately reflect how much money they make. The downside to a bank statement loan is that the interest rate is usually higher than for a standard self-employed mortgage programs plus you may be required to provide additional financial documents.

Use the FREEandCLEAR Lender Directory to find lenders that offer bank statement mortgages and other programs for self-employed borrowers

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4

Get Pre-Approved for Your Mortgage

Because self-employed borrowers are typically required to provide additional information and complete extra steps in the mortgage process it is crucial that they understand what size loan they can afford and get pre-approved by a lender at the beginning of the home buying or refinance process.  Different lenders may calculate your income differently so knowing what size loan you qualify for upfront is especially important.  Plus, you may be able to identify and resolve issues that come up in the pre-approval process before you officially apply for the mortgage.  It is better to get pre-approved at the beginning of the mortgage process than to be surprised or disappointed later in the process.

It is important to highlight that you should not pay to get pre-approved for a mortgage.  Also, just because you are pre-approved by a lender does not obligate you to work with that lender to finalize your loan.  You may find a lender that offers better terms or a special mortgage program for self-employed borrowers and you are free to work with that lender when you apply for your loan.  Our get pre-approved form is free and easy-to-use and enables you to connect with multiple lenders before you apply for your mortgage.

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5

Contact Multiple Lenders to Get the Best Mortgage

Self-employed borrowers should contact at least four lenders including at least one mortgage broker to make sure you get the loan with the lowest mortgage rate and fees.  Some lenders do not offer mortgages to self-employed applicants so is important to understand that you have lender options. You will likely need to contact several lenders to gather multiple proposals to compare and select the one that fits your financial goals.  When you contact lenders be sure to ask about both standard self-employed mortgage programs and bank statement loans to determine the option that is right for you. 

It is important to work with a lender who has processed and closed many mortgages for self-employed borrowers because they better understand the complexities and nuances of the application process and hopefully work harder and smarter on your behalf to close your loan.  Contact multiple lenders in the table below to find the one that best meets your needs as a self-employed applicant.

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

Sources

Self-Employed Mortgage Guidelines: https://www.fanniemae.com/content/guide/selling/b3/3.2/01.html

Self-Employed Mortgage Borrower: http://www.freddiemac.com/blog/homeownership/20181026_self_employed_learn_how_to_get_mortgage.page

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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