It’s possible to get a home loan if you’re self-employed, but you may need to take extra steps to demonstrate your creditworthiness. Here are some helpful tips:
Refinance Options for Self Employed with No Documentation or a Stated Income Loan
- Stated Income Non-Conforming Loans
- No Income No Asset Home Refinancing
- Reduced Doc Mortgage Refinance Loans
- Stated Income 2nd Mortgage
- Stated Income/ Verified Assets Refinance
- Limited Documentation Jumbo Loans
- No Doc Home Equity Loans
How Is Self-Employment Income Calculated for a Mortgage?
Banks and mortgage lenders typically evaluate your income over the past two years when considering mortgage applications, especially for self-employed individuals.
In the case of self-employment, it’s your net profit that matters, not your gross income the total income remaining after deducting expenses.
However, if your income decreased in the second year, they may base their assessment on the lower-earning year.
Lenders may express caution if there’s a significant drop in income, so be prepared to provide an explanation if needed.
Self-Employed Mortgage Requirements
In general, Fannie Mae and Freddie Mac guidelines dictate that borrowers should have a minimum of two years of self-employment income to qualify for a mortgage. Exceptions may exist for those self-employed for just one year if they meet additional criteria, such as having worked in the same occupation in the preceding years with comparable or higher income.
If there are less than two years of business records, anticipate a more thorough examination, and verification of any prior employment will be necessary.
Private money lenders typically have less income requirements and many will use 24 months of bank statements rather than 2 years of tax returns. These are called non qualified mortgages. These non QM lenders offer no income mortgages and bank statement loans for borrowers that meet their lending criteria.
How Self Employed Borrowers Get Approved for Home Loans
Use a variety of documents: Self-employed individuals can use multiple documents to verify income, such as tax returns, bank statements, business profit and loss statements, 1099s, work contracts, and invoices. You might also need to provide proof of any additional income, like rental income or investment dividends.
Consider non-conforming loans: Non-conforming loans could be a viable option for self-employed borrowers.
Work with a self-employed lending specialist: Consider partnering with a mortgage broker or lender who specializes in working with self-employed clients.
Frequently Asked Questions for Self Employed People Applying for a Home Loan
Could claiming deductions for self-employment expenses impact your mortgage application?
Yes, it could. The number of deductions you claim for business expenses might influence the loan amount that lenders approve for you. This is because deductions lower your net self-employment income, which lenders consider when evaluating your mortgage application.
Do self-employed applicants need better credit scores than salaried W2’d borrowers?
For self-employed individuals, most lenders may mandate higher credit scores, better debt-to-income ratios, or greater cash reserves to qualify for a self-employed mortgage. Boosting your credit score, accumulating a larger down payment, or reducing debts before applying for a mortgage could enhance your approval prospects. Additionally, having a co-borrower whose income stems from a traditional salary can be beneficial.
What makes it more challenging for self-employed individuals to meet mortgage qualifications?
Self-employed individuals often face hurdles in securing mortgages because lenders perceive their income as less predictable, which introduces an element of risk. Consequently, mortgage lenders typically request additional documentation and may impose stricter credit and financial criteria as a result.
Document Requirements for Self-Employed Mortgage Programs
While specific requirements can vary among lenders, be prepared to furnish the following below:
- Government-issued identification.
- Complete personal tax returns for the past two years.
- IRS Form 4506-T, granting permission for third parties to access your tax records.
- Earnings statements.
- Bank statements for both business and personal accounts.
- Statements from asset accounts, including retirement or investment accounts.
- Business license.
- Monthly mortgage statement.