Mortgages for Self-Employed

Getting a mortgage as self-employed

Getting a mortgage for a regularly employed individual can be complicated. You must meet all the lender’s requirements pertaining to the credit score, down payment and debt-to-income ratio (DTI). Being self-employed adds a significant layer of complexity to this process. Lenders often view self-employed borrowers as higher-risk compared to traditional employees due to the variability and unpredictability of their income. As a result, self-employed borrowers may face stricter requirements or additional scrutiny when applying for a mortgage or other types of loans. But first let’s define self-employment:

What is a self-employed borrower?

A self-employed borrower is an individual who earns income through their own business or freelance work rather than being employed by a company or organization. This could include entrepreneurs, freelancers, consultants, independent contractors, and small business owners. Unlike traditional employees who receive a regular paycheck, self-employed borrowers typically have variable income that may fluctuate from month to month or year to year.

I am self-employed, can I buy a home? 

Being self-employed does not prevent you from buying a home, but the process can be a bit more complex compared to someone with a traditional salaried job. Here are some key points to consider:

  • Stable Income: Lenders typically want to see a stable income history. This usually means providing two to three years of tax returns to demonstrate consistent earnings.
  • Good Credit Score: A strong credit score is crucial. It shows lenders that you are responsible with credit, which can help you qualify for a mortgage.
  • Higher Down Payment: Some lenders may require a larger down payment from self-employed borrowers to offset the perceived risk. Having at least 20% of the home’s price as a down payment can improve your chances.
  • Lower Debt-to-Income Ratio: Your debt-to-income (DTI) ratio, which is the percentage of your monthly income that goes toward debt payments, should be low. This will also offset the risk the perceived risk of self-employment and help you qualify. 
  • Proper Documentation: You will need to provide detailed financial documentation. This includes your tax returns, profit and loss statements, and possibly bank statements.

mortgage for self-employed

I very recently launched my business, can I get a mortgage loan?

Getting a mortgage loan shortly after launching your business can be challenging. Lenders typically prefer at least two years of self-employment history to prove that your business is stable and capable of generating consistent income. Some lenders can be more flexible if you can prove that you have been in the same industry before starting your business or have a strong, documented track record of income. 

 

What additional documentation will lenders require from a self-employed person?

When applying for a mortgage as a self-employed individual, you will typically need to provide more detailed documentation compared to a salaried employee. Here is a list of the additional documentation you may be required to submit:

  • Personal Tax Returns: Lenders generally request your last two to three years of personal tax returns (Form 1040 in the U.S.), including all schedules (e.g., Schedule C, E, or F).
  • Business Tax Returns: If you own a business, you may need to provide your business tax returns (Forms 1120, 1120S, or 1065) for the last two to three years.
  • Profit and Loss Statement (P&L): A year-to-date profit and loss statement that shows your business’s income, expenses, and net profit. This document helps lenders assess the current financial health of your business.
  • Balance Sheet: A balance sheet showing your business’s assets, liabilities, and equity. It provides a snapshot of your business’s financial standing at a given point in time.
  • Bank Statements: Lenders may request several months of both personal and business bank statements to verify your income and cash flow. This can also help confirm the legitimacy of your business.
  • Client Contracts or Invoices: You may be asked to provide contracts or invoices from clients, especially if you have long-term or recurring contracts, to verify your income stability.
  • Business License: If applicable, provide a copy of your business license to prove that your business is legally registered and operational.
  • CPA Letter: Some lenders may ask for a letter from a Certified Public Accountant (CPA) to verify your business’s financials or to confirm that you have been self-employed for a certain period.
  • Explanation of Income Fluctuations: If your income varies significantly from year to year, you may need to provide an explanation for the fluctuations, especially if they are due to one-time events or seasonal business cycles.

mortgage loan self-employed

Reasons why my mortgage loan could get denied, if I am self-employed

As a self-employed individual, your mortgage loan could be denied for several reasons. Here are some common factors that might lead to a denial:

  • Inconsistent Income: Lenders prefer stable, predictable income. If your earnings fluctuate significantly from year to year, it may raise concerns about your ability to make regular mortgage payments.
  • Insufficient Income: If your reported income is too low to cover the mortgage payments, including taxes and insurance, your loan application may be denied. This can be an issue if you deduct many business expenses, reducing your taxable income.
  • Insufficient Documentation: Lenders require extensive documentation from self-employed borrowers. If you fail to provide complete or accurate tax returns, profit and loss statements, bank statements, or other required documents, your application may be denied.
  • Business Instability: Lenders look for a stable business history. If your business is new, has been losing money, or shows signs of instability, lenders might see you as a higher risk, leading to a denial.
  • Unverifiable Income Sources: If you cannot adequately verify the sources of your income, such as through contracts, invoices, or bank deposits, lenders may deny your mortgage application.
  • Short Business History: Many lenders prefer to see at least two years of business history. If you have been self-employed for a shorter period, you may have difficulty proving income stability, leading to a potential denial.

Bottom Line

While it may be more difficult to secure a mortgage loan as a self-employed individual it is not impossible. Preparation, proper documentation, and working with the right lender can increase your chances of getting approved. Besides the regular factors that lenders consider (credit score, down payment size and debt-to income ratio), adequate history and stability of income generation are the key factors in obtaining a mortgage loan for someone who is self-employed. If your mortgage loan is denied due to the issues related to your self-employment you might consider using a co-signer with a more traditional income source to strengthen your application and increase your chances of getting approved. Please reach out to me to discuss any self-employment related questions at 312-296-4175 or email me at connect@borislending.com. I lend in all 50 states and I am never too busy for your referrals!