How to Get a Mortgage When You're Self-Employed

If you've found your dream home and need financing, you might find it more challenging to prove your income if you are self-employed. In addition to a good credit score and information about your assets, mortgage lenders want to see a stable source of income, and that's not always easy when you are your own employer.

While this may seem daunting, you still can provide proof of income with tax returns and business documents such as profit-and-loss statements and business contracts.

Requirements and Challenges to Get a Mortgage When You’re Self-Employed

Lenders often consider self-employment income streams unpredictable because they may fluctuate over time. While it doesn't mean you can't get a mortgage, you may have to provide more information to qualify.

In general, mortgage lenders will want to review your:

• Income, including monthly gross income (before taxes)
• Outstanding debts and monthly debt payments
• Credit history, including your credit score, which represents a numerical rating of your creditworthiness and ability to repay your debts
• Savings and how much you have available for a down payment

When you're self-employed, you can face challenges in providing your lender with proof of income, especially if you don't receive a W-2 like those who work for a company. However, certain documents can help move your application forward.

Business Owners

Business owners can use business tax returns (two years) and profit and loss (P&L) statements as proof of income. Providing your business licenses, client relationships, and existing business insurance can show that you run an active business.

Freelancers and Contract Workers

If you're a freelancer, contractor, working side jobs, or part of the gig economy, you can provide two years of personal tax returns, bank statements, and letters from clients. Proof of income from investments, such as rental income or 1099s showing dividend and interest payments, can also help.

Steps to Get a Mortgage When You’re Self-Employed

Being self-employed means that you work for yourself. You may be a freelancer, a contractor, or own a business. Some self-employed workers have side jobs or work in the gig economy. Whatever the case, the bottom line is that the money you earn doesn't come from an employer.

Determine if You're Self-Employed

You can determine whether you're self-employed using criteria from the Internal Revenue Service (IRS). The agency says you're self-employed if you are:

• An independent contractor or sole proprietor who engages in a trade or business
• A partner in a trade or business
• In business for yourself, including a gig worker or a part-time business

Review Mortgage Types

You may qualify for a specific type of mortgage loan as a self-employed individual:

• Conventional: A conventional mortgage is typically offered by a private lender, such as a bank or credit union. Because they aren't offered or backed by a government agency, they can be tougher to get.
• FHA loan: A Federal Housing Administration (FHA) loan is insured by the federal government and offered by a bank or other lender. FHA loans are generally designed for those with low credit scores and first time homebuyers.
• VA loan: A VA loan is offered to veterans, service members, and their surviving spouses through the Department of Veterans Affairs. There are no down payment or mortgage insurance requirements with these loans.
• USDA loan: This type of loan is offered by the Department of Agriculture to lower-income individuals who live in rural areas.
  

How to Apply

Applying for a mortgage when you're self-employed follows the same steps as when you're traditionally employed.

Asking a lender to pre-qualify you can help you understand how much you can afford without committing to a specific lender. With this information, you can move through the process:

1. Research lenders, their products, interest rates, and loan terms they offer. Consider starting with your bank, credit union, or financial institution.
2. Gather your documents. In addition to the ones listed above (like your tax returns and 1099s), you'll need proof of identity documents and gift letters if your parents (or anyone else) plan on contributing to your mortgage.
3. Apply for pre-approval, which involves the lender performing a credit check, which shows up as a hard inquiry on your credit report. This important step can help your offer get accepted.
4. Submit your application. Include your personal information, proof of income, and other information.
5. Wait for the decision. The lender needs time to review your application, supporting documents, and other information like the home appraisal. Be prepared to provide additional information if needed.
6. Close the loan. If approved, sign your loan documents, pay the closing costs, and begin paying your mortgage. If you're declined, review your letter to see how to improve your situation.
   

How to Improve Your Chances of Getting a Mortgage If You’re Self-employed

There are several things you can do to help improve your chances of getting a mortgage as a self-employed individual.

Improve Your Credit Score

Your credit score shows your creditworthiness and determines the interest rate you'll receive. Most borrowers had an average credit score of 758 as of the second quarter of 2024, according to Experian. The minimum credit score varies by lender and the type of mortgage you get.

Improving your credit score can take time. Making payments on time, keeping your credit utilization ratio low, and limiting the number of credit applications can positively impact your credit score.

Lower Your Debt-to-Income (DTI) Ratio

Your debt-to-income (DTI) ratio measures how much of your monthly income goes to paying your monthly debts. It shows lenders how much risk you pose as a potential borrower. You calculate your DTI ratio by dividing your total monthly debt payments by your gross monthly income. Multiply the result by 100 to get a percentage.

A high DTI ratio alerts lenders that you're at a higher risk of defaulting on your mortgage while a lower ratio means you are a low-risk borrower. Most lenders look for a range between 28% and 35%. Some lenders may approve borrowers with a ratio as high as 43%.

You can lower your DTI ratio by increasing your income, paying down or consolidating your debt—which reduces your monthly payment total—and avoiding new additional/new debt.

Down Payment

A down payment represents the amount of cash you pay upfront when buying a home. A higher down payment improves your chances of getting approved for financing.

The down payment is a percentage of the purchase price of the property, and the lender finances the remaining balance after deducting your down payment.

Lenders may require a certain percentage for your down payment based on the type of loan. The minimum requirements generally range between 5% and 20%.

Get a Co-Signer

A co-signer can be a family member, friend, or someone who signs the mortgage application with you. A co-signer with a steady income stream and a good credit score can improve your approval chances. By co-signing, their name doesn't appear on the home title, so they have no ownership rights to the property.

Keep in mind that although you are the primary borrower and are responsible for making your payments, your co-signer assumes the loan if you default. This also puts their credit score and assets at risk if you stop making your mortgage payments.

The Bottom Line

Being self-employed doesn't preclude you from getting a mortgage, but you may have to jump through a few extra hoops to get approved for financing. Ensure you have as much documentation as possible to prove your income before applying.

You should also improve your credit score and lower your DTI ratio while you build your savings. Taking these steps can make the application process smoother and ensure you're on the path to approval.