Must-Know Facts for the Self-Employed Homebuyer

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You might have heard it’s more challenging to get a mortgage if you’re self-employed.

And it is true that self-employed homebuyers do have to jump through a few more hoops than a W-2 employee. Namely, you’ll have to gather a bunch of paperwork to validate your income and self-employment history. Yet taking the time to organize documents will be well worth it when you’re holding the keys to your new house.

Just ask the 14 million nontraditional earners who became homeowners.

If you want to join them, here’s everything you need to know about applying for a home loan when you’re self-employed.

Mortgage basics for self-employed borrowers

Mortgage lenders consider the same criteria when looking to qualify borrowers, whether you’re self-employed or a regular employee. In other words, you’ll be filling out the same mortgage application as a person who gets a W-2 every year.

Lenders will examine your income, debt-to-income ratio, assets, and credit score.

However, since business owners or freelancers usually have an income that fluctuates, lenders have to take a closer look at the vitality and stability of your business.

Lenders need to verify that your income is high enough—and will remain at that level—to make monthly mortgage payments to repay a loan.

As far as what type of loan you can apply for, independent workers are eligible for the same standard home loans, such as conventional, FHA, VA, USDA, and even jumbo programs, as everyone else.

What lenders need from self-employed borrowers

Most lenders require the paperwork to support a two-year self-employment history.

“Not only must the individual have been in business for two years, but most programs also require a two-year history of filing tax returns as self-employed,” says mortgage lender Alvaro Moreira, owner of the Georgia mortgage company Moreira Team.

So depending on how your business is structured, you might be asked for two years of your 1099s or a statement from your accountant as proof of self-employment history.

If you’re a hair stylist, contractor, or another professional requiring a license, you could show a lender your state license as proof of how long you’ve been in business. You’ll also need to bring a signed year-to-date profit and loss statement, balance sheet, and at least three months of business bank statements to the table, adds Moreira.

The application process might be longer

Generally, processing a mortgage application will take the same amount of time as it does for a traditional borrower.

However, gathering all your documentation can sometimes stall the process, especially if your business has recently experienced changes.

“In some instances, processing a loan may take longer if you own multiple businesses, recently changed the structure of your business, or moved your business,” says Moreira.

What counts as eligible income

Are you a gig worker with many different clients, an independent caregiver, or a cupcake bakery’s sole proprietor?

Whatever money you’re earning—including tips—counts. Lenders are mainly looking to see if your income is stable.

“All types of income are welcome, including part-time, seasonal, odd jobs, business owners, corporations, etc.,” says Mallory Miller, vice president of purchase lending for Lower.

Lenders look at your income differently

Lenders look at the net income when you’re self-employed versus the gross income of W-2 workers.

That difference could muddy the water a bit. Generally, when you’re self-employed, you’re looking for all the savvy tax breaks you can get to lower your net income so you don’t have to write a big check to Uncle Sam on tax day.

Yet, that tax break can make it harder to qualify for a mortgage if your net income is low or you take a loss.

“It can be a tricky trade-off,” says Miller. “Although paying lower taxes on less income is certainly preferential, it may not allow you to qualify for as much house.”

So if you’re thinking of buying a home in the future, you might want to consider taking fewer tax deductions now. Talk to your accountant and lender to weigh the pros and cons first.

What to do if you get turned down

There are many reasons self-employed and traditional borrowers are denied a loan.

It might have been that your debt-to-income ratio was too high, or your income was inconsistent. Whatever the cause, it’s heartbreaking to have your hopes for buying a home dashed.

You can wait and work on getting your finances healthier before applying again. Or, if you want to buy a home sooner than later, you can apply for a bank statement loan.

“A bank statement loan uses an average of deposits instead of the standard tax return calculation,” says Moreira. But before you get too excited, you should know these loans are nonqualified, meaning they don’t have any of Fannie Mae‘s or Freddie Mac‘s guardrails.

“They carry extremely high interest rates and typically have less appealing features, such as prepayment penalties or balloon payments,” says Miller. Still, a bank statement loan might be a “last resort” loan for people who otherwise don’t qualify for a traditional home loan.

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