Buying a house when you’re self-employed requires jumping through more hoops than a W-2 employee, but it doesn’t mean you’re out of luck. As a self-employed borrower, you’ll need to provide more paperwork to prove that you have consistent work and stable or increasing income.
If you’re considering a self-employed mortgage, here are your loan options and how you can make yourself a more attractive applicant.
What Is a Self-Employed Borrower?
Self-employment refers to working for oneself rather than working for an employer. Lenders may classify you as a self-employed borrower if:
- You have sole ownership of your business
- You own at least 25% of your business
- You’re a freelance or contract worker whose income is solely or mostly from IRS Form 1099-MISC
Can You Get a Mortgage if You’re Self-Employed?
Yes, it’s possible to get a mortgage if you’re self-employed. There are also plenty of loan options, but the qualification process may be different compared to W-2 employees. Here are some mortgage options if you’re buying a house when you’re self-employed.
Conventional Mortgages
Conventional mortgages are available to all homebuyers who can meet the requirements. If you’re self-employed, you’re more likely to qualify for a conventional loan, which is a “conforming” loan backed by Fannie Mae or Freddie Mac, if you have a good credit score, have been in business for two or more years, and have records showing reliable income.
Some lenders may be more flexible than others. You may also be approved with one year of self-employment history. However, lenders may look for two previous years in a related field and earn a comparable (or greater) income.
Government-Backed Mortgage
Government-insured mortgages typically have looser qualification requirements and are another option available to self-employed borrowers. Here are your options:
- FHA: FHA loans are insured by the Federal Housing Administration and are a great option for low- to moderate-income first-time home buyers. To qualify, you must have been self-employed for at least two years (or one year with two years in a related role), a minimum credit score of 580, and a down payment of at least 3.5%.
- VA: A VA home loan is a $0 down loan backed by the Department of Veterans Affairs and issued by private mortgage lenders. Self-employed veterans and select surviving military spouses can qualify for a VA mortgage. To qualify, you will need to verify your income, show two years of self-employment history, and provide business documents. Policies will also vary depending on the lender.
- USDA: Backed by the U.S. Department of Agriculture, USDA home loans are also available to the self-employed. The USDA requires that lenders review the most recent two-year history of business earnings and a 20% variance in income earnings within 12 months may require the lender to review additional documentation.
Bank Statement Mortgages
A bank statement loan allows borrowers to apply for a mortgage without having W-2s or tax returns to prove income. As an alternative, lenders will look at 12 to 24 months of bank statements to verify business income. While decisions are based mostly on business bank statements, personal bank statements may also be used.
Co-Borrower or Co-Signer
If qualifying on your own is too difficult, you may need to apply with a co-borrower who is a W-2 employee, like a spouse or significant other. A relative may also co-sign on your mortgage; however, they will also be assuming responsibility for the mortgage if you default.
Buying a House When You’re Self-Employed
If you’re buying a house when you’re self-employed, lenders will analyze the following factors:
- The stability of your income
- The location and nature of your business
- The demand for the product or service offered by your business
- The financial strength of your business
- The ability of your business to generate and distribute sufficient income to make monthly mortgage payments
Mortgage lenders want to see stability in your business income, which is why you may be asked for two years of tax returns as proof. Some lenders may even consider the lower of the two years and any significant decreases in income could raise questions during underwriting.
Lenders may also ask you to provide:
- A business license
- Year-to-date profit and loss statement
- Balance sheet
- Bank statements
- Additional sources of income
Buying a house when you’re self-employed also requires a good credit score and a low debt-to-income (DTI) ratio. Most lenders look for a minimum credit score of 620 for conventional loans and a DTI no higher than 43%, although lenders typically prefer a DTI ratio lower than 36%.
Lenders may also want to see cash reserves to help cover any temporary decreases in income. A larger down payment can also be helpful when you’re applying as a self-employed borrower, but down payment requirements for self-employed borrowers with good credit and sufficient income are usually no different.
Find a Total Mortgage branch near you and speak with one of our mortgage experts today to discuss your options.
How to Prepare for Buying a House When You’re Self-Employed
Considering buying a house when you’re self-employed but not quite ready? There are several steps you can take to better prepare yourself and make you a more attractive borrower.
1. Separate your business and personal finances. If you make business purchases on your personal credit card, then this could increase your credit utilization, which could have a negative impact on your mortgage application. Keep all personal and business expenses separate.
2. Improve your credit score. Check your credit report and identify any areas of improvement before a lender counts it against you. A lender may reject your application or give you a higher interest rate if you have a lower credit score.
3. Pay down debt. The last thing you want to do before applying for a mortgage is to take on additional debt. Lower your DTI ratio as much as possible to improve your chances of qualifying for a mortgage.
4. Maintain consistent work. A lender may reject your application if you have inconsistencies in your work or income. Make sure you have at least two years of steady work and stable or increasing income.
5. Save. Buying a house when you’re self-employed is expensive. Save as much as possible for a down payment, closing costs, and living expenses. Lenders also like to see cash reserves for when you have months with lower income.
Apply Today With Total Mortgage
Buying a house when you’re self-employed means you need to be prepared. You’ll need to provide enough documentation to prove that your business can financially support you and your home loan. Lenders also want to see that you have a good credit history and have been in business for at least two years with steady or increasing income.
Be sure to explore Total Mortgage’s loan program options when you’re ready to purchase a home. If you have any questions about your mortgage options, schedule a meeting with one of our mortgage experts.
Apply online today and get a free rate quote.
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