When you’re self-employed, qualifying for a mortgage isn’t always a straightforward process. While some homebuyers might compare online mortgage lenders for quick approval, your financial picture might not fit a simple checklist.
That said, qualifying for a mortgage when you’re self-employed can be easier than you think–especially when you partner with a mortgage broker who has experience working with self-employed homebuyers.
How to Qualify for a Mortgage If You’re Self-Employed
The biggest difference between self-employed borrowers and other homebuyers is this: mortgage lenders will consider the financial health of your business right alongside your personal financial portfolio.
As a self-employed homebuyer, your business is most likely your greatest source of income. For this reason, mortgage lenders will look at your business directly to evaluate risk. In general, qualified borrowers will secure the best rates when they have high cash reserves and a low debt-to-income ratio.
Quick Tips for a Strong Mortgage Application if You’re Self-Employed
- Check your credit report for errors (and don’t add new loans or debt)
- Improve your DTI (debt-to-income) ratio by paying down debt
- Stack your cash reserves
- Prepare for a large down payment
- Have your documentation in order
Worth noting: If you have substantial assets or investment income, or even rental income from other properties, discuss this with your mortgage broker. In these instances, there are several loan options available.
An experienced mortgage broker can set you up with a better mortgage that gives you every advantage and rewards your financial foundation.
Best Mortgage Options for Self-Employed Borrowers
1. Conventional Loan
Conventional mortgages remain one of the most popular types of home loans because they are flexible and offer the best mortgage rates to qualified borrowers. Since conventional loans are backed by mortgage lenders (and not the government), lenders can be selective and offer competitive rates and loan packages to self-employed homebuyers.
For self-employed borrowers with a high credit score and solid business financials, a conventional mortgage often comes with the lowest mortgage rates and more flexibility on the terms of your home loan.
So, if you’re self-employed with a credit score above 720, cash reserves, a healthy business model, and consistent business income, then a conventional mortgage could be your best option.
2. Bank Statement Loan
If you’re self-employed but don’t have regular reportable income, a bank statement loan might be a great fit. With a bank statement loan, a self-employed homebuyer can apply for a mortgage without providing traditional documentation to prove income (such as W-2s or paystubs).
Instead of using traditional income as a metric, mortgage lenders will review your bank statements (12-24 months) to establish self-employment income. Again, remember that lenders will look at both your personal bank statements and those of your business.
A bank statement loan is a good alternative for self-employed homebuyers, especially if you don’t have W-2s, paystubs, or if your tax returns tend to change year to year.
3. FHA Loan
FHA loans offer more flexible terms to qualify, such as a lower credit score and low-to-moderate income requirements. Since the government backs FHA loans, mortgage lenders can offer low interest rates with just 3.5% down.
Beware that FHA loans are typically more strict when verifying income, and it may take longer to qualify as a self-employed homebuyer.
However, an FHA loan is worth considering if you run a steady business with verifiable income but have a lower credit score.
What documentation is required to apply for a mortgage if self-employed?
A mortgage application for self-employed homebuyers typically requires the same information as a standard home loan. Be prepared to also submit the following:
- Tax returns for two years, both personal and business
- K-1 statement to show earnings (if a partnership or S-Corp)
- Proof of self-employment (business license, signed letter from your CPA)
- Proof of current business (recent invoices, client contracts)
- Annual P&L statements
- 12-24 months of bank statements (business and personal)
- Additional income (rental income, alimony, investments, etc.)
In short, mortgage lenders evaluate risk with every borrower. So when you’re applying for a mortgage as a self-employed borrower, having your paperwork ready will keep things moving.
Working with a mortgage broker who has substantial experience with self-employed homebuyers can get you a better mortgage every time. A qualified mortgage broker will look at your borrower credentials along with your business financials and help build a mortgage application that works to your advantage.
As is the case with most home loans, working together with a mortgage broker early on will get you the best mortgage and the strongest loan terms.
Connect with an experienced mortgage broker early on if you’re self-employed and ready to buy your next home. We work with entrepreneurs and small business professionals across the San Francisco Bay Area, Los Angeles, Seattle, and throughout California, Oregon and Colorado. Our goal is to save you money and help you reach financial freedom. Give us a call to get started.