Self-employed mortgage loans are common
Self-employed mortgage loan borrowers can apply for all the same loans “traditionally” employed borrowers can.
You’re held to the same standards for credit, debt, down payment, and income as wage-earning applicants. The part that can be tough is documenting your income.
Proving your cash flow as a business owner, contractor, freelancer, or gig worker can require more paperwork than for W-2 employees. As long as you meet loan guidelines and can document steady, reliable cash flow, being self-employed should not stop you from buying a home or refinancing.Check your self-employed mortgage eligibility. Start here
In this article (Skip to...)
- Self-employed loan requirements
- How to get a self-employed loan
- Self-employed mortgage loans
- Calculating income
- Determining self-employed status
- Joint loans
- Self-employed loan lenders
- Approval tips
Can you get a mortgage while self-employed?
Absolutely, being self-employed doesn’t mean you’re automatically disqualified from securing a mortgage.
In fact, there are various loans for self-employed individuals designed specifically to meet their unique needs. While obtaining a self-employed mortgage loan may require a bit more documentation and scrutiny, it’s certainly possible.
Self-employed home loans could also require more substantial cash reserves or a larger down payment to offset the lender’s risk, given that self-employed income can sometimes be inconsistent.
If you’re aiming for the best mortgage terms, it’s advisable to work with lenders who specialize in self-employed loans. These financial institutions often have more experience and flexibility in dealing with income that may not be as steady as that of a W-2 employee.
Self-employed mortgage loan requirements
Most mortgage lenders require at least two years of steady self-employment before you can qualify for a home loan. Lenders define “self-employed” as a borrower with an ownership interest of 25% or more in a business, or one who is not a W-2 employee.Check your self-employed mortgage eligibility. Start here
However, there are exceptions to the two-year rule:
- You might qualify with just one year of self-employment if you can show a two-year track record in a similar line of work. You’ll need to document an equal or greater income in the new role compared to the W2 position
- Some lenders will even count one year of related employment plus one year of formal education or training as an acceptable work history
If you’ve been self-employed for less than one year, you’re not likely to qualify for a home loan.
Loan program requirements
In addition to proving their employment history, self-employed borrowers need to meet standard loan program requirements. Guidelines vary by loan type (more on this below). But in general, you should expect a lender to look at the following criteria in addition to your employment and income:
- Credit score
- Credit history
- Current debts (for your debt-to-income ratio)
- Liquid savings and assets (for your down payment and closing costs)
Lenders will scrutinize both the property you want and your personal finances. The type of residence (house, condo, etc.) and its intended use (primary residence, vacation home, investment property) will impact your rate and the mortgage loan types you qualify for.
How to get a self-employed mortgage loan in 5 steps
Getting a mortgage as a self-employed individual can seem daunting, but by breaking it down into steps, you can navigate the process more easily. Here’s what you should know.
1. Determine if you need a self-employed mortgage
If you own a quarter or more of a business or earn your income as a freelance worker or service provider, you’ll generally be categorized as self-employed for mortgage purposes. The same applies if you’re a gig worker paid via a 1099 form rather than a W-2.
The level of financial screening you experience will differ depending on your business model, the mortgage lender, and whether you are applying for the loan with someone else. Since there isn’t a standard employment agreement to support your earnings, lenders will typically need additional income proof to make sure you can afford the monthly payments.
You may also be viewed as a riskier borrower if your earnings fluctuate frequently. For these reasons, you may be subject to additional income documentation, especially if:
- Your earnings are reported through 1099 forms as opposed to W-2s.
- Your income is documented in the Schedule C part of your tax returns.
- You lack a consistent salary from your own business.
2. Find out the requirements for self-employed mortgage loans
Mortgage lenders will generally consider any source of steady income that is stable, consistent, and ongoing. That means all kinds of self-employment income are eligible for mortgage financing, including (but not limited to):
- Business owners
- Freelance income
- Contract work
- Seasonal work
- Gig work and side jobs
These types of income can be considered independently or as additional funds on top of a primary income source. Lenders will sometimes even count unemployment income for contract or seasonal workers with a regular, documented history of receiving unemployment in the off-season.
For any source of income, your loan officer must determine whether it will be “ongoing.” Generally, the income must seem likely to continue for at least three years after the loan closing. So your business prospects need to look good. A history of declining income will not improve your chances of qualifying for a mortgage.
For self-employed borrowers, a loan officer may conduct a review of the borrower’s business to determine its stability and the likelihood that their income will continue at the same level. If you’re in a declining industry — such as a hotel owner during the coronavirus pandemic or a builder during a housing crash — this could pose problems with your approval.
3. Collect proof of your self-employment income
In most cases, self-employed mortgage loan borrowers need to provide the following documents to prove their income to a mortgage lender:
- Two years of personal income tax returns
- Two years of business tax returns, including schedules K-1, 1120, and 1120S
- Business license
- Year-to-date profit and loss statement (P&L)
- Balance sheet
A Certified Public Accountant (CPA), an accountant, or a tax preparer can prepare these documents. Tax professionals are accustomed to these requests for a mortgage loan application. Your CPA may even be able to email you all your required documentation on the same day.
In addition to the documents required for conventional financing, home buyers who are applying for a jumbo loan often need to provide a signed CPA letter stating they are still in business.
If the business is a sole proprietorship — not a partnership, corporation, or S corporation — you may not have to provide business tax returns.
If you’ve been self-employed at the same business for five years or more, you may only have to provide one year of business and/or individual tax returns instead of two.
Finally, for self-employed borrowers with a history of paying themselves, mortgage guidelines as of June 2016 state that the borrower no longer needs to prove access to the business income. The applicant, however, may still need to show that the business earns enough to support income withdrawals.
How to deal with income inconsistencies
If your income is not regular and reliable, lenders generally won’t count it. However, many businesses go through ups and downs. For instance, a home developer starting a new community might have a lot of expenses one year, including buying property, pulling permits, and constructing houses. The business may show little income or even big losses.
The following year, though, the houses sell, and the income soars. If you submit a loan application during the “down” year, you’ll have to prove to the lender that your business is healthy, and this is a normal pattern.
In cases like this, your loan officer might require additional proof of income. Expect to give the underwriters three, four, or five years of tax forms and a statement from your accountant to show this.
You should also prepare to explain any significant year-over-year decrease in income when you apply for a mortgage as a self-employed applicant.
Do I have to report self-employed income?
If you have a self-employed side gig, you might not have to report self-employment income to your lender. For instance, if you’re a W-2 employee but you drive rideshare or freelance for some extra cash.
Fannie Mae and Freddie Mac say that for conventional loans, self-employed income does not need to be reported if it’s not used to qualify for the mortgage. In other words, if you can qualify based on W-2 income and personal savings alone — not using funds in a business account — then your lender can ignore the self-employment income and you don’t need to document it.
This provision also applies to borrowers living off of retirement income, social security income, pension payments, or dividends. Note that these rules apply to conforming (Fannie Mae and Freddie Mac) home loans. Guidelines for other loans may be different.
4. Understand how lenders calculate self-employed income for a mortgage
If you hope to buy a house or refinance while self-employed, this point is key: lenders only count taxable income toward your mortgage.
Underwriters use a somewhat complicated formula to come up with “qualifying income” for self-employed borrowers. They start with your taxable income and add back certain deductions, like depreciation, since that is not an actual expense from your bank account.
Business owners and other self-employed workers often take as many deductions as possible. While this can save you a lot of money on income tax, it can also negatively impact your mortgage application.
For instance, say you earn $6,000 a month. But after deductions, your taxable income is only $4,000 per month. Here’s how your home buying budget changes:
|Monthly Income||$6,000 (total)||$4,000 (taxable)|
|30-Year Fixed Interest Rate||3.5%||3.5%|
|Current Monthly Debts||$300||$300|
|Maximum Home Price*||$407,800||$250,000|
*Example assumes a maximum debt-to-income ratio of 36%
In this example, losing $2,000 off your monthly income reduces your home buying budget by more than $150,000.
Bank statement loans for self-employed
Some self-employed borrowers get around this issue by using a type of mortgage called a bank statement loan, which lets you qualify based on total funds coming into your bank rather than income tax returns.
“Bank statement loans can be useful for buyers who don’t have 1-2 years of returns to verify income,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
However, bank statement loans are considered non-qualified (non-QM) mortgages. This means they lack some of the consumer protections of major loan programs and have higher interest rates.
Most self-employed borrowers stick to mainstream loan programs with lower interest rates, even though their loan amount may be smaller.
5. Research the best lenders for self-employed borrowers
Consider working with a loan officer well-versed in handling mortgages for self-employed applicants. They’re often more adept at advocating for your application and can better articulate your financial standing to the underwriting team.
Lenders that provide FHA loans might also be a preferable choice over conventional loan providers, as these loans come with government backing that lessens the lender’s risk.
A mortgage broker could guide you to financial institutions that focus on home loans for self-employed individuals.
How to calculate self-employment income for a mortgage loan
To calculate self-employed mortgage loan income during the mortgage process, lenders typically average your income over the past two years and break it down by month.Check your mortgage eligibility. Start here
“Loan officers will use the worst-case scenario,” says Meyer. “So if you made less in the most recent year, we will use a 12-month average, and if increasing year-over-year, then a 2-year average.”
For example, say your tax returns for the past two years show an income of $65,000 and $75,000. Here’s how a lender would calculate your monthly income for qualifying purposes:
- Year one: $65,000
- Year two: $75,000
- Average yearly income: $70,000 ($65K + $75K / 2)
- Monthly income: $5,830 ($70K / 12)
This calculation shows the lender that you have $5,830 per month to spend on housing and other expenses.
How DTI affects your mortgage application
Underwriters don’t look at income in a vacuum. They look at it in the context of your existing debts. This is known as your debt-to-income ratio, or DTI.
DTI measures your current, ongoing debts, like credit cards, auto loans, and student loans, against your gross monthly income. Lenders subtract your current debts to see how much money is ‘left over’ each month for mortgage payments.
Lenders often prefer a DTI below 45%. In the example above, no more than $2,620 can go toward monthly debt payments, including your mortgage.
Say you already pay $500 monthly for a car loan and credit cards. Here’s how a lender uses that DTI number to calculate your home buying budget:
- Monthly income: $5,830
- Maximum DTI: 45%
- Max. total debt payments: $2,620 (0.45 x $5,830)
- Existing debts: $500/month
- Max. mortgage payment: $2,120 ($2,620 - $500)
That $2,120 monthly budget will get you a much lower loan amount than the full $5,830 monthly income. That’s why borrowers should be aware of their debt-to-income ratio when budgeting for homeownership.
DTI may be important for self-employed borrowers since large tax write-offs can lower your income in a lender’s eyes. So existing debts will take up a larger share of your approved budget. If you anticipate this issue, it may be worth paying some current debts down before applying for a home loan.
Self-employed mortgage loan options
Self-employed borrowers are eligible for all of the major mortgage programs, including conforming loans (backed by Fannie Mae and Freddie Mac) and government-backed FHA, VA, and USDA loans.
Briefly, here’s how your loan options compare.Verify your self-employed mortgage eligibility. Start here
Conventional loans for self-employed
Also known as conforming loans, conventional loans are mortgages eligible for purchase by Fannie Mae or Freddie Mac. The majority of U.S. mortgages are conforming loans.
Fannie Mae and Freddie Mac will qualify self-employed borrowers after at least two years of self-employment or with at least one year of self-employment, plus a documented history of at least two years earning comparable income in a comparable role.
Aside from these guidelines, conforming loans require the following:
- 620 minimum credit score
- 3% minimum down payment
- Debt-to-income ratio below 45%, in most cases
- Loan amount within conforming loan limits
If your credit report reveals good credit and you have a moderate to large down payment (10–20%), a conventional mortgage is often the most affordable option.
Home buyers who put at least 20% down can avoid private mortgage insurance (PMI) on these loans. The same goes for homeowners who refinance with at least 20% home equity. Avoiding PMI can be a significant saving when compared to an FHA mortgage.Check your conventional loan eligibility. Start here
FHA loans for self-employed
The Federal Housing Administration insures FHA mortgages. These loans are often best for low-credit and first-time home buyers due to their lenient requirements.
To qualify for FHA financing, you need only:
- 580 credit score or higher
- 3.5% down payment
- DTI below 50% (varies by lender)
- Plan to use the property as your primary residence
- Loan amount within current FHA loan limits
For self-employed borrowers, FHA also requires a two-year self-employment history or one year of self-employment plus two years in a related role with similar income. If you have one year in a similar role and one year of formal training or education, FHA may count this as an acceptable two-year history.
The FHA typically requires two years of personal and business tax returns to document self-employment income.
However, you may not have to show business tax returns if:
- Your personal returns show increasing income over the past two years
- Down payment and closing costs are not coming from a business account
- Your loan is not a cash-out refinance
VA loans for self-employed
VA loans, guaranteed by the Department of Veterans Affairs, are meant for veterans, service members, and some surviving spouses. They have below-market interest rates and no ongoing mortgage insurance.
Requirements for VA mortgages are also fairly lenient. As a self-employed borrower, you’ll need at least two years in your current role, or one year of self-employment plus a two-year related work history.
Other requirements include:
- 580–620 credit score (varies by lender)
- 0% down payment
- Eligible service history
A VA mortgage should always be the first stop if you’re eligible, since it’s typically the lowest-cost home loan on the market.Check your VA loan eligibility. Start here
USDA loans for self-employed
USDA loans are mortgages guaranteed by the U.S. Department of Agriculture. These home loans require no down payment and tend to have below-market rates.
To qualify for USDA financing, you must have a low-to-moderate income and live in a qualified “rural area.” Self-employed applicants need a two-year history in their current role, or at least one year of self-employment and two prior years in a related position.
Other requirements for a USDA mortgage include the following:
- 640 credit score or higher
- 0% down payment
- Income is no higher than 15% above the area median
- Property is a single-family residence
- You use a 30-year, fixed-rate mortgage
The rural requirement for a USDA mortgage might sound restrictive. But most of the U.S. landmass qualifies as rural under the USDA’s definition. So if this type of loan appeals to you, it’s worth asking a lender whether you and your home qualify.Check your USDA loan eligibility. Start here
Alternative mortgage loans for self-employed borrowers
Self-employed mortgage loans have gained a reputation for being challenging since the housing downturn. That’s because many self-employed individuals don’t show enough income when the lender’s definition of “income” is the bottom line on your personal tax return. And the old “stated income” or “no income verification” loans these borrowers used in the past have disappeared.
However, alternative programs allow you to count all of your business cash flow (the amount you actually bring in) as income. These are often called bank statement loans. Under these guidelines, you must bring in 12 or 24 months of your personal and/or business bank statements. Lenders analyze the cash coming in each month, average it, and use that amount (or some formula based on that amount) to come up with qualifying income.
Note that these programs usually come with higher mortgage rates than mainstream loans because they’re considered non-QM and therefore riskier to lenders. Bank statement loans can also be harder to find, as mainstream lenders often don’t offer them. But there are plenty of specialized and non-QM lenders that do.
How to determine if you’re self-employed
You don’t have to own your own business to be considered self-employed.
A loan officer will likely consider you self-employed if any of the following apply:Check your self-employed mortgage options. Start here
- You own 25% or more of a business
- You do not receive W-2 tax forms
- At least 25% of your income is from self-employment
- You receive 1099 tax forms
- You are a contractor or freelancer
- Most of your income is from dividends and interest
If you’re part owner of a business but your share is less than 25%, you are not considered self-employed for home loan purposes.
Remember that you are not required to report self-employed income under Fannie Mae and Freddie Mac’s lending rules. If you have a freelance job or small business on the side and you don’t need the income from it to qualify, your lender can ignore it on your mortgage application.
Can you get a joint mortgage if one person is self-employed?
Maybe you want to apply with a spouse or co-borrower, but one of you is self-employed and the other is traditionally employed. Most mortgage lenders will be fine with this, provided the self-employment income meets the guidelines listed above and both applicants meet loan requirements.Verify your self-employed mortgage eligibility. Start here
You also have the option not to count your co-borrower’s income source if you wish. If you qualify for a loan with your own income and your co-borrower is self-employed, lenders can ignore that business in underwriting.
Why would you want them to ignore that business? Many small ventures, or even larger start-ups, don’t show income on tax returns. At least on paper, they generate losses. While these business write-offs are beneficial for reducing taxes, they can decrease your qualifying taxable income when you apply for home financing.
What’s the best lender for self-employed mortgage loans?
Self-employed borrowers don’t have to hunt for specialized lenders. Just about any mortgage company can approve your application with self-employment income. That means you have the flexibility to shop around for the loan type you want and a competitive interest rate.Check your mortgage eligibility. Start here
Keep in mind that almost every lender will calculate your income based on your tax returns. So the amount you earn could look lower than it actually is.
It is possible to qualify based on bank statements rather than tax returns, but these lenders are harder to find and charge higher interest rates. See our list of bank statement lenders.
Most self-employed borrowers go the mainstream route and apply for a conventional or government-backed loan with a major lender. This allows you to shop around and take advantage of competitive rates.
Tips to qualify for a self-employed mortgage loan
If you’re self-employed and want to buy a home, it helps to plan in advance. Work with a mortgage professional and involve your accountant as well.
You can change the way you write off your business expenses and the amount of taxable income. Alternatively, you can amend previous tax returns to show higher income from the past.Check your self-employed mortgage options. Start here
Note that some deductions won’t hurt you. Underwriters add them back into your taxable income:
- Business use of home
Deductions such as meals are subtracted from your income.
You and your accountant can check out the form underwriters use and see how lenders will view your income right now.
FAQ: Self-employed mortgage loans
The length of self-employment needed to qualify for a mortgage varies among lenders, but a common requirement is at least two years of consistent income in your current line of work. Having two years’ worth of tax returns helps to showcase financial stability, which is crucial when looking to secure a self-employed mortgage loan.
For those in the realm of self-employment, proving your income can be slightly more complicated than for those who receive regular pay stubs. Generally, you’ll need to provide two years of tax returns, profit and loss statements, and bank statements from both your savings accounts and business accounts. Some lenders may also require a substantial amount in cash reserves to consider you for the best mortgage options.
Absolutely, being self-employed doesn’t mean you can’t get approved for a mortgage. While loans for self-employed individuals might require more paperwork—like tax returns and cash reserves for a few months—there are many lenders who specialize in self-employed home loans. Preapproval might take a little longer, but it’s certainly attainable if you meet the lending criteria, such as having a good credit score and consistent income.
Finding the best mortgage for self-employed individuals often means looking for a lender who understands the nuances of independent contractor income. Adjustable-rate mortgages can offer lower initial monthly payments, while a fixed-rate mortgage provides the stability of unchanging monthly payments over the life of the loan. Speak with a financial advisor to figure out which type of mortgage suits your needs the best.
While buying a house as a self-employed individual may present some unique challenges, such as more stringent income verification, it’s not necessarily harder. What’s crucial is to maintain healthy financial habits, like keeping your debt-to-income ratio low and having savings accounts with enough reserves. With proper planning and documentation, you can obtain a mortgage for self-employed without much hassle.
The best mortgage lender for self-employed individuals can vary depending on your specific financial situation, credit score, and what you’re looking for in a mortgage. It’s advisable to shop around and speak to lenders who specialize in self-employed loans to find the most competitive rates and terms. Some lenders offer specific mortgage products designed for the self-employed, so it’s worth doing your research to find a lender that best fits your needs.
Today’s self-employed mortgage loan rates
Buying a home or refinancing when you’re self-employed might not be as difficult as you think.
Self-employed people have access to the same mortgage programs and interest rates as other borrowers in today’s real estate market. But it’s up to you to shop around for the best self-employed mortgage loan program and lender that suits your needs.
Comparing at least three mortgage offers will help you find the lowest interest rate and best terms possible.Time to make a move? Let us find the right mortgage for you