How to Get a Mortgage If You’re Self-Employed, a Small Business Owner or Gig Worker

There are millions of self-employed people in the United States.

This includes independent contractors, freelancers, business owners, and gig workers.

Given the large number of people with this employment status, it stands to reason that many will apply for a mortgage loan at some point.

Self-employed people can buy houses like anyone else.

Yet:

The road to a mortgage approval has been bumpy for a few of these workers. 

The good news is that some lenders have begun to loosen their requirements in recent years.

This makes it slightly easier for these borrowers to buy a house.

Why Is It Harder for Self-Employed Borrowers?

If you’re earning a good living as a self-employed worker, getting a mortgage loan seems easy, right?

You might earn more than many salaried workers who own their homes. 

The difference:

An employee usually earns roughly the same pay each pay period. Your income may fluctuate from week to week or month to month.

And unfortunately, income fluctuations will prompt many lenders to take a closer look at your finances. 

Requires clear documentation

The bank may request more documentation to get a clearer picture of your earnings.

They need to be confident in the stability of your income.

This ensures your ability to pay the mortgage payment each month.

Impact of write-offs

Another challenge is that it can look as if you earn less on paper. 

It’s common for self-employed people to write off business expenses.

This can include business meals, supplies, materials, etc.

The problem:

Too many write-offs might reduce your taxable income. This is income lenders use for qualifying purposes. 

Let’s say you make $6,000 a month, yet you write off $1,500 in expenses. Lenders will determine your qualifying amount using your net profit of $4,500. A lower net profit can reduce buying power.

Fortunately, lenders can add certain expenses back into your income. These expenses include write-offs for the use of a home office and depreciation. 

As a general rule of thumb:

If you plan to purchase a house within the next two years, consider limiting your number of business write-offs. This helps increase your taxable income.

How to Get Approved for a Mortgage When Self-Employed

Self-employed people have unique challenges when buying a house.

But it is possible for them to get approved for mortgages, especially with recent changes. 

If you’re self-employed and thinking about getting a mortgage, here are a few tips to get your foot in the door.

1. Provide at least one year of business tax returns 

In the past, self-employed borrowers had to show business tax returns for at least two years before getting a mortgage.

According to new guidelines, some lenders will now allow self-employed people to get approved for a mortgage with only one year of business tax returns. 

The catch:

You must have previous experience in the field.

So, if you worked as a magazine staff writer for many years, and you’ve been a full-time freelance writer for the past 12 months, you’re able to get approved with one year of freelance tax returns. 

Of course, the money earned throughout your year in business must be consistent and enough to qualify for a mortgage loan.

2. You don’t have to disclose side hustle income

When applying for a mortgage, lenders would typically require information on all income sources.

This included income from:

• hourly jobs
• part-time jobs
• salaried wages
• retirement income
• side hustles

Fannie Mae has recently changed their guidelines on disclosure of side hustle income.

Basically, if income from a regular salaried job is enough to qualify for a mortgage, you don’t have to provide proof of income for gig work or side hustles.

3. Prepare a year-to-date Profit and Loss statement

As a self-employed worker, prepare to provide your lender with a year-to-date Profit and Loss statement.

Lenders need to review recent income records before approving a mortgage loan.

Employees usually submit 30 day’s worth of paycheck stubs.

Since you don’t receive a paycheck, a Profit and Loss statement is one way for lenders to assess how much you’ve earned for the year thus far. 

This confirms that your income is consistent with income reported on your tax return. Contact your accountant to prepare this statement. 

4. Provide bank statements

You should also prepare to submit financial statements to the mortgage lender.

This includes statements for deposit accounts, retirement accounts, and other assets you have.

This is how the bank confirms that you have enough cash for mortgage-related expenses.

Buying a home will typically require a down payment between 3 percent and 5 percent. You’re also responsible for closing costs, which can range from 2 percent to 5 percent of the loan amount.

Not only will the mortgage lender use bank account statements to confirm an adequate cash reserve.

Some banks will accept bank statements instead of a year-to-date Profit and Loss statement when verifying recent income.

5. Improve your credit and debt-to-income ratio

Even those self-employed individuals make up a large percentage of the working population, unpredictable income makes some banks nervous.

So, you’re starting the buying process at a disadvantage. 

One way to stay a step ahead is to keep your finances in good shape. With that being said, a higher credit score can make it easier to get your foot in the door. 

Several loans only require a minimum credit score between 580 and 620.

Yet, applying for a mortgage with a credit score of at least 740 makes it easier to get approved as a self-employed applicant. 

A good credit score means you have a history of successfully managing debt and credit. So you’re likely to pay your mortgage on time.

Also, it helps to reduce your debt-to-income ratio.

Mortgage lenders typically want to keep a borrower’s debt-to-income ratio between 36 percent and 43 percent. 

If possible, come up with a plan to pay off debt. This includes a car loan, a student loan, personal loans, and credit cards. Do so before applying for the mortgage.

You’ll have a much lower debt percentage than other applicants. This can make it easier to qualify for a loan when you’re self-employed.

6. Build a larger equity cushion

You’re not required to put down more as a self-employed borrower, but a bigger down payment never hurts. 

This can result in a larger equity cushion and cut your lender’s risk. This doesn’t mean you have to put down 20 percent, though.

If you can, aim for 10 percent to 15 percent down.

A larger down payment can make a huge difference in building lender confidence. Plus, a higher down payment can help you secure a better mortgage rate.

7. Find a portfolio lender

Many mortgage companies sell their loans on the secondary market.

So they must adhere to guidelines set by investors. Other lenders, though, keep some of the mortgages they originate. 

These are portfolio lenders.

Sometimes, they have programs that make it easier for self-employed borrowers to get a mortgage.

So while a traditional mortgage lender might require tax returns, a portfolio lender might use alternative documentation. This can include a business license, 12 months of business bank statements, and perhaps a letter from your CPA.

Portfolio lenders might even qualify you with a higher debt-to-income ratio — up to 50 percent. 

These unique loans aren’t offered by every bank, so you’ll need to shop around and compare options.

Regardless of whether you use a traditional lender or a portfolio lender, always get at least three to four loan quotes to ensure the best deal.

You can also use a mortgage broker to find a portfolio lender that works with self-employed borrowers. Know that brokers usually charge a fee between 1 percent and 2 percent of the loan value.

Final Word

Getting a mortgage as a self-employed borrower can be challenging.

But the good news is that many lenders are loosening their requirements. This is making it easier for these applicants to qualify. 

A home loan approval still involves providing documentation as proof that you can handle a mortgage payment. So gather your information early.

Tax returns and bank statements are typical.

And, depending on your unique situation, the bank might need extra information.

It’s important to submit paperwork as soon as possible. This can speed the mortgage process and keep closing on schedule.