For self-employed individuals, securing a mortgage can feel like a daunting task. With an income that often varies and a lack of a traditional paycheck, lenders may see you as a higher-risk borrower. However, it’s entirely possible to get approved for a home loan as a self-employed worker, but it may require extra effort and preparation.
Unlike salaried employees, self-employed workers don’t have pay stubs or a consistent salary to provide as proof of income. Instead, they must paint a comprehensive picture of their business and financial health to assure lenders they are financially stable and capable of repaying the loan.
Here’s what you need to know about getting a mortgage when you’re self-employed.
Understanding Self-Employment and Mortgages
Self-employed individuals include sole proprietors, freelancers, gig workers, independent contractors, and business owners who don’t receive a W2 from an employer. While lenders typically look for stability in your income, they understand that self-employed people might not have the same predictable earnings. In fact, most lenders want to see at least two years of self-employment history to evaluate your financial stability.
The good news is that lenders offer options tailored for non-traditional income sources. These loans take into account your business's financial health, rather than just relying on traditional employment history.
Key Documents You’ll Need to Submit
Pexels | RDNE Stock project | For a mortgage, self-employed individuals must submit extra documents verifying income and business.
When applying for a mortgage, self-employed individuals need to provide several key documents to verify their income and business status. In addition to the usual paperwork, such as bank statements and identification, the following are often required:
1. Proof of Employment and Income
You will need to prove that you are indeed self-employed and earning an income. This can include a letter from your accountant, proof of business insurance, or a business license. Freelancers may also provide a letter from a client or professional association confirming their work.
2. Business Financial Documents
Lenders want to understand the financial health of your business. Be prepared to provide profit-and-loss statements, bank records, and cash-flow reports from the last two years. These documents give the lender a clearer view of your business's earning potential.
3. Tax Returns
Lenders require tax returns from the last two years, along with specific forms depending on your business type, such as Schedule C for LLCs or Form 1065 for partnerships.
4. Future Financial Projections
To increase your chances of approval, it’s helpful to show that your business is expected to grow. Providing a well-thought-out business plan for the next few years can demonstrate to lenders that your income is likely to remain stable or even increase.
Types of Mortgages That May Work for You
Self-employed homebuyers have more options today than ever before. Non-qualified mortgages (non-QM) are a great choice for those with unpredictable or nontraditional income streams. These loans typically have more flexible requirements and may be easier to qualify for compared to conventional loans.
Some examples include:
1. Bank Statement Loans
Instead of relying on W-2s or tax returns, a bank statement loan uses your bank statements over the past two years as proof of income. This is an excellent option if your income is unpredictable but you have a healthy bank balance.
2. Profit-And-Loss Loans
For business owners, a profit-and-loss loan considers the financial performance of your business rather than traditional income documentation.
3. Investor Cash Flow Loans
Real estate investors can apply for these loans, which are based on the rental income generated by the property, rather than traditional income or employment verification.
Tips to Boost Approval Odds
Freepik | syda_productions | Ensure clean business finances by establishing separate accounts and credit.
Getting approved isn’t just about income—it’s about showing you’re a low-risk borrower.
1. Choose a Lender That Understands You - Local banks or credit unions may be more flexible and more familiar with small businesses in the area. If you run a local service, your lender may even be a customer.
2. Put Down a Larger Down Payment - The more you invest upfront, the less risk for the lender. This can lead to better loan terms and higher approval chances.
3. Improve Your Credit Score - A score above 760 often gets the best mortgage rates. Make on-time payments, reduce your debt, and double-check your credit reports for errors.
4. Separate Business and Personal Finances - Keep your business finances clean and independent. Open separate accounts, use a business credit card, and get a DUNS number to establish credit for your business.
5. Consider a Co-Signer - Asking someone to co-sign can help if your income or credit isn’t strong enough on its own. Keep in mind, co-signers are responsible for the loan if payments aren’t made.
Preparation Pays Off for Self-Employed Homebuyers
Qualifying for a mortgage when you’re self-employed takes more work, but it’s far from out of reach. The key is preparation—having the proper paperwork, showing financial stability, and understanding what lenders want to see.
Whether you’re just starting your business or have been running it for years, there are loan options that fit your needs. The more organized and transparent you are with your financials, the smoother the road to homeownership will be.