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

When you’re looking to get a mortgage, self-employed borrowers fill out the same mortgage application as everyone else. There’s no such thing as a self-employed mortgage loan. Lenders look at 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, lenders require you to provide all necessary documentation to verify your income and employment.

Qualifying for a mortgage when you’re self-employed

If you work for yourself or are seasonally employed, you must be diligent about tracking and organizing your income. Staying organized helps when you apply for a mortgage.

What are mortgage lenders looking for?

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

• Stable income
• The nature of your self-employment
• The financial strength of your business
• The likelihood that 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 the past 2 years.

Employment verification

Lenders use employment verification to confirm that you’re self-employed. 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” (d/b/a) certificate

Income documentation

Supply proof of steady, reliable income, and you move one step closer to getting approved for a mortgage. This type of proof of income is the reason these loans are sometimes called “bank statement loans.”

Even if you’re making consistent money now, your past income will also influence your ability to get a loan. Your lender will likely 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 Schedule 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 might still qualify for a mortgage even with less than 2 years of self-employment, though it may be more difficult, and not all lenders may approve you. Most lenders will require that your business has been 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.

Your lender also may consider your professional background, education, and other factors to assess your business’s stability.

Tips for putting 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 watch this percentage closely. A low DTI ratio is a hallmark of healthy finances. It can show lenders that you can afford a mortgage comfortably.

To calculate your DTI ratio, divide your monthly recurring debt by your gross monthly income. You shouldn’t include bills that can change each month, such as:

• Utilities
• Property taxes
• Groceries
• Repairs

If your DTI ratio 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 ratio, 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 ratio is 50%. Like your DTI ratio, the lower your credit utilization ratio, the better.

Tip 3: Try to keep business expenses separate

Charging business purchases to personal credit cards can hurt your application if your credit utilization is high. To improve your profile, try to separate business and personal expenses by using different accounts and credit cards for each.

Keeping business and personal expenses separate helps lenders accurately evaluate your financial situation during underwriting. Lenders may look at your bank and credit card statements as part of the mortgage underwriting process. If your business and personal expenses are mixed, the underwriting team may have a hard time getting an accurate read on your company’s financial status. This may not give a good impression of your ability to pay back your mortgage.

Tip 4: Consider alternative loan options

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

Tip 5: Be ready to make a larger down payment

Coming in with a larger down payment may help convince lenders to approve your mortgage and offer you a lower interest rate than they otherwise would. If you need help saving for a down payment, see if you can take advantage of down payment assistance programs.

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

If you think your employment or income history is affecting your ability to get a mortgage, a co-borrower or co-signer could help. This person will need to have a good income and credit score to improve their chances of getting approval, and you’ll want to make sure they understand their legal responsibilities.

Keep in mind that signing a mortgage with a co-signer or co-borrower can strain your relationship. If you don’t make your monthly payments on time, your co-signer is legally required to make those payments, and if they don’t, it can damage their credit. Make sure you understand the pros and cons before taking out a mortgage with a co-borrower or co-signer.

The bottom line: You can get a mortgage even if you’re self-employed

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. It helps to keep your business records and personal financial records separate so your lender can easily and accurately document your income and credit history.

Whether you work for someone or run your own business, getting preapproved is a vital first step to helping you determine which home loan is right for you. Start the preapproval process with Rocket Mortgage® today!