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If you are self-employed, either as a freelancer or as the owner of your own business, your income can fluctuate greatly from year to year. That can make it difficult to get approved for a mortgage, although there are some things you can do to improve your chances. Here are three tips for securing a mortgage if you are self-employed.
When a borrower is self-employed, lenders generally look more closely at how income is verified because earnings may vary from month to month or year to year. In these cases, the review typically focuses on whether the income can be documented clearly and whether it appears consistent enough to support mortgage payments. Being prepared to explain how your income is earned and to present organized records can help make the verification process smoother.
While your ability to pay back a mortgage is the most important factor in approval, your credit score is a close second, and that goes for every borrower, not just those who are self-employed. If you have a credit score in the high range — something above 750 or 760 — it will help you get approved for a mortgage.
To boost your score, make sure you pay all bills on time, pay down your debt levels and don’t make any new big purchases or apply for new credit soon before you apply for a mortgage
The more money a bank lends you to buy a house, the more risk it is taking in that the money won’t be paid back. If you are self-employed and considered a higher risk to begin with, one way you can alleviate some of that risk is to be able to put down a large amount of money.
Putting down 20 percent is standard for a conventional loan, and you should be willing to contribute at least that much. Putting down at least 20 percent also will save you money in the long run, because you won’t have to pay for mortgage insurance and you will pay less in finance charges over the life of the loan.
One way to put a mortgage lender at ease about your ability to pay for a mortgage is to have significant reserves in the form of assets. If you have large amounts of money in regular savings, brokerage and retirement accounts, it offers a reserve for you to tap should your income take a dive. Other forms of property, such as personal and business property that’s paid off and has value, also help.
Part of the mortgage approval process involves lenders not only looking at how much money you are bringing in, but also how much money is going out in the form of bill payments. More specifically, lenders will look at your debt-to-income ratio, which is a measure of how much of your current monthly income is dedicated to paying your current monthly bills.
If that ratio is too high, you run the risk of getting denied on a mortgage application, whether or not you’re self-employed. As such, do your best to pay down as much of your debt as possible. This will allow the lender to feel more comfortable that your income will be more than sufficient to pay your mortgage without most of your income going towards other debts.
When you apply for a mortgage, you will need to prove your assets, income, and debts, and that is usually done by providing the lender with a set of documents. The average salaried borrower will already need to provide a set of documents to the lender to prove their ability to pay a mortgage. But self-employed professionals may need to add a couple more to the pile.
For instance, you will likely need to submit tax forms from at least two or three years back to show the lender that your business is making stable profits and isn’t fluctuating wildly from one year to the next. Having all necessary documents lined up and ready to be submitted can help improve your chances of getting approved for a home loan.
In addition to income documents, lenders may also consider how long you have been self-employed and whether your business appears stable over time. A longer and more consistent work history can make it easier to demonstrate that your income is reliable. Showing continuity in your line of work and the general stability of your business can strengthen your overall application.
For self-employed borrowers, qualifying income may be reviewed differently than gross business revenue alone. Lenders may look closely at business finances to understand how expenses affect the income that is ultimately available to support mortgage payments. Because of this, it is important to understand that deductions and reported business costs can play a role in how qualifying income is evaluated.
If you’re a self-employed entrepreneur, several non-QM (non-qualified) mortgages may be available to you that don’t rely on traditional documentation:
| Bank Statement Loans | This option is particularly beneficial for those lacking conventional documentation, and uses 12 to 24 months of personal or business bank statements for income verification. |
| 1099-Only Loans | Specifically designed for freelancers and contractors, these loans consider 1099 forms and year-to-date earnings, eliminating the need for tax returns. |
| DSCR Loans | For real estate investors, eligibility is assessed based on rental income and the debt service coverage ratio, rather than personal income. |
| Non-QM Investor Loans | These financing solutions offer flexibility for investors who don’t conform to traditional requirements, leveraging alternative documentation and revenue generated from properties. |
| Profit & Loss (P&L) Only Loans | Ideal for business owners with variable income, these loans allow qualification through CPA-prepared profit and loss statements. |
| Asset-Based Loans | This option allows applicants to use savings, investments, or other liquid assets for qualification purposes, with no requirement for employment verification. |
If you’re looking to buy a home as a self-employed individual and need to apply for a mortgage to fund your purchase, we’re here to help. Sammamish Mortgage has been providing mortgage programs to borrowers all across the Pacific Northwest since 1992, including Washington State, Idaho, Colorado, Oregon, and California. Get in touch with us today if you have questions about the mortgage application process, or visit our website to get an instant rate quote.
Yes. Self-employed borrowers can qualify for a mortgage if they meet the lender’s requirements for income, credit, assets, debt-to-income ratio, and documentation.
A stronger credit score improves approval chances and may help you qualify for better loan terms. A score above 750 or 760 is especially helpful.
A larger down payment reduces the lender’s risk and can make approval easier when income varies from year to year. Putting down 20 percent on a conventional loan can also help you avoid mortgage insurance.
Yes. Savings, brokerage accounts, retirement accounts, and other valuable assets can reassure lenders that reserves are available if income drops.
Lenders review debt-to-income ratio to see how much of your monthly income goes toward existing debts. A lower ratio can improve your chances of approval.
Yes. Paying down debt can lower your debt-to-income ratio and show that more of your income is available to cover a future mortgage payment.
Self-employed borrowers often need to provide documents that verify income, assets, and debts. Tax returns from the past two or three years are commonly requested, along with other financial records.
Bank statement loans are non-QM mortgages that use personal or business bank statements, often from the past 12 to 24 months, instead of traditional income documentation.
Yes. Options may include 1099-only loans, profit and loss only loans, asset-based loans, and other non-QM programs that use alternative documentation.
Self-employed real estate investors may qualify for DSCR loans or other non-QM investor loans that focus on property income and cash flow rather than personal income alone.
Whether you’re buying a home or ready to refinance, our professionals can help.
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