How to get a mortgage when you're self-employed

When you’re self-employed and want to buy a home, you fill out the same mortgage application as everyone else. Mortgage lenders also consider the same factors when you’re a self-employed borrower: your credit score, debt, assets and income. So what’s different?

When you have a boss, a lender will go to them to verify your employment status and your income. When you’re the boss, a lender will require the necessary documentation to verify your income and employment from you.

Qualifying for a mortgage when you’re self-employed

If you work for yourself or are seasonally employed, you must be diligent about organizing and keeping track of your income. That’ll help when it’s time to apply for a mortgage – and so will this overview of what to know and how to prepare.

What are mortgage lenders looking for?

Expect lenders to require the following proof before considering you for a mortgage:

• Income stability
• The location and nature of your self-employment
• The financial strength of your business
• The likelihood your business can generate sufficient income into the future

What documents do you need to provide?

To start the home buying process, you must provide a history of uninterrupted self-employment income, usually for at least 2 years. Here are some examples of documents a lender may request:

Employment verification

Employment verification will confirm your self-employment. Acceptable forms of verification can include emails or letters from:

• Current clients
• A licensed certified public accountant (CPA)
• A professional organization that verifies your membership
• A state or business license you hold
• Business insurance
• A “doing business as” (DBA) certificate

Income documentation

Supply proof of steady, reliable income, and you’re one step closer to getting approved for a mortgage. This type of proof of income is one reason these loans are sometimes called “bank statement loans.” And even if you’re making consistent money now, your past income will also influence your ability to get a loan. Your lender will ask for the following:

• Personal tax returns (including W-2s if you’re paid through your corporation, partnership or sole proprietorship)
• Business tax returns (which may include a Schedule C, Form 1120-S or K-1, depending on your business structure)
• Bank statements (monthly or quarterly documents lenders can use to verify you have enough money to cover a down payment)

What if you’ve been self-employed for less than 2 years?

You can get a mortgage on your home even if you’ve been self-employed for less than 2 years. Ultimately, your business must be active for at least 12 consecutive months. And your most recent 2 years of employment (including salaried work and other forms of income in the same line of work) must be verified.

In this situation, your lender may also look at your professional background and education to determine whether your business can continue its track record of stability.

Tips to put your best application forward

As your own boss, you want your business to look its best to prospective clients. As someone who wants to buy a home, you want your loan application and finances to look their best to lenders.

Tip 1: Check your debt-to-income ratio

Your debt-to-income ratio (DTI) is the percentage of your net business income that goes toward paying your monthly debts. Lenders pay attention to this percentage. A low DTI ratio is a hallmark of healthy finances and can indicate to lenders that you have enough money in your budget to comfortably afford a mortgage payment.

To calculate your DTI, divide your monthly recurring debt by your gross monthly income. You shouldn’t include bills, such as utilities, property taxes, groceries and repairs, when calculating DTI because their amounts can change each month.

If your DTI is more than 50%, focus on reducing your debt before applying for a mortgage.

Tip 2: Keep an eye on your credit

For lenders, the credit history in your credit report is a strong indicator of your ability to repay debts. Unlike your DTI, the higher your credit score, the better your chances of approval and favorable loan terms.

Another measure lenders consider is your credit utilization, which measures how much of your available credit you use.

For example, if you’re using $10,000 out of $20,000 in available credit, your credit utilization is 0.50, or 50%. Like your DTI, the lower your credit utilization ratio, the better it is for your credit score, which is better for your mortgage application.

Tip 3: Try to keep business expenses separate

If your credit utilization is high because you charge business purchases to your personal credit cards, this may harm your application.

While it may not be possible to keep your business and personal expenses completely separate on your credit report, it’sa good idea to keep your business and personal expenses separate. Wherever possible, use separate accounts and credit cards to present a more favorable, straightforward profile on your application.

Tip 4: Consider alternative loan options

Consider other home loan options if you can't get approved for a conventional mortgage loan. A self-employed borrower may qualify for a Federal Housing Administration (FHA) loan or qualify for a Department of Veterans Affairs (VA) loan if they’re an eligible active-duty service member, veteran or surviving spouse.

Tip 5: Be ready to make a larger down payment

While you can buy a home loan with a smaller down payment being able to make a larger down payment, may help convince lenders to approve your mortgage and offer a lower interest rate. If you need help coming up with the money for the down payment, see if you can take advantage of down payment assistance programs.

Tip 6: Find a co-signer or co-borrower

If you suspect your employment status and income history are getting in the way of mortgage approval, recruiting a co-borrower or co-signer may help. The right candidate should make enough money and have a high enough credit score to improve your chances of qualifying. Just make sure your co-borrower or co-signer understands the legal responsibilities associated with their role.

The bottom line

To apply for a mortgage while self-employed, you must verify and document your income while maintaining a low DTI ratio and qualifying credit score.

Whether you have a boss or you’re the boss, preapproval is a vital first step to helping you determine which home loan is right for you. Start the preapproval process with Rocket Mortgage® today!