Mortgages for the Self-Employed | Explore Self-Employed Mortgage Options

Being a self-employed entrepreneur is a great accomplishment. You've worked hard to get your business up and flourishing while doing something you're passionate about. They say if you do something you love, you'll never work a day in your life. As large share of U.S. home buyers are self-employed, getting mortgage-approved can be a bit more challenging than using traditional income, however the extra hurdles are nothing self-employed buyers can’t overcome.

Self-employed mortgage borrowers can apply for all the same loans ‘traditionally’ employed borrowers can. There are no special requirements that make it harder for self-employed people to get a mortgage, since you’re held to the same standards for credit, debt, down payment, and income as other applicants.

The part that can be tough is documenting your income. Proving your cash flow as a business owner, contractor, freelancer, or gig worker can require more paperwork than for W-2 employees.

If you know what to expect and have the right paperwork in order, being self-employed shouldn’t get in the way of your plans to buy a home.

Self-employed mortgage rules

Most mortgage lenders require at least 2 years of steady self-employment before you can qualify for a home loan. Lenders define “self-employed” as a borrower who has an ownership interest of 25% or more in a business, and who is not a W-2 employee.

If you’ve been self-employed for less than one year, you’re not likely to qualify for a home loan.

Types of mortgages for self-employed home buyers

Today, lenders can accept personal tax returns, business tax returns, and even bank statements as proof of your ability to repay the loan.

The trick is figuring out which strategy will make it easiest for you to get approved.

Standard mortgage options

The standard mortgage loans available to all home buyers are also available to self-employed borrowers. These include conventional loans (backed by Fannie Mae and Freddie Mac), FHA loans, VA loans, USDA loans, and jumbo loans.

All of these major loan types require at least two years of self-employment history to qualify.

However, many lenders and loan programs are flexible. You can often get approved with only one year of self-employment history, as long as you worked 2 prior years in a related field and earned a comparable or greater income.

The best mortgage for you will depend on your goals.

For instance, do you have good credit, 20% down, and want to avoid mortgage insurance? Then a conventional mortgage is best.

A government-backed loan (FHA, VA, or USDA) is often better if you need looser eligibility requirements.

FHA loans allow a credit score as low as 580 and are even more flexible about credit history. If you qualify for VA or USDA financing, no down payment is required.



Bank statement mortgages

Often, the big challenge for self-employed borrowers is not whether they can get a mortgage but how much they can get approved for.

That’s because mortgage lenders only count taxable income for your mortgage qualification. And self-employed owners tend to write off as many of their business expenses as possible.

While large write-offs can save you money at tax time, they might hurt your home buying qualification.

When a lender looks at your tax returns, your income could look smaller than it really is. And that means you might qualify for a smaller loan amount. Enter the bank statement loan.

Bank statement mortgages were created as an alternative solution for self-employed home buyers with large tax write-offs. Instead of qualifying based on your tax returns, these loans allow you to qualify using ‘real’ income shown on your bank statements.

Bank statement lenders typically look at your past 12-24 months’ worth of bank statements to find your average monthly income, which could be greater than the income shown on your tax returns.

However, there’s a downside. Bank statement loans are considered non-qualified mortgages (Non-QM loans). As such, they’re not available from all lenders and often have significantly higher rates than the standard mortgage loans discussed above.



Portfolio lenders

Most mortgages are originated by lenders and then sold to investors through the secondary market. However, there are some lenders — so-called ‘portfolio lenders’ — who keep some of their loans after origination.

Because such mortgages are not being sold to investors, they do not have to meet investor or program requirements. Instead, the bank can make its own standards for borrowers.

Portfolio lenders are often more open to the self-employed, be sure to ask your loan officer about self-employed mortgage options.



Asset Depletion

Asset depletion is a method for calculating monthly income by dividing a borrower’s total assets by a set number of months. The borrower is not required to cash in their assets as they're only used to demonstrate an ability to make the mortgage and housing payments.

Borrowers who use an asset depletion program to qualify do not need to show any source of income or employment. They can instead rely on asset depletion calculations based on a combination of cash, retirement, and investment monies divided by 360 payments. Assets are generally qualified with 100% of cash accounts and 70% of retirement and investment accounts (100% of retirement funds may be used if the borrower is over 59 ½ years old).

For example, if a 45 year old borrower has $2,000,000 in liquid assets, and another $1,000,000 in retirement and investment funds, then their qualifying monthly income would be $7,500 ($2,000,000 + $700,000 = $2,700,000; divided by 360 = $7,500).

Asset-rich individuals who are unable to provide a qualifying employment history or sufficient income may find this as an ideal solution. However, not all loan programs allow asset depletion as an acceptable income source.




Please call us today to learn more about self-employed loan options and whether any of these methods will work for your specific transaction.




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Aundrea Beach-Greco

Mortgage Lender, CMPS

NMLS 333739

📱 +1 702-326-7866

📧 info@aundreabeach.com

🌐 www.AundreaBeach.com

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Aundrea Beach-Greco, CMPS. Licensed Mortgage Loan Officer. NMLS 333739

702-326-7866 info@AundreaBeach.com

Find me online www. AundreaBeach.com

Apply online at www.iLendLasVegas.com

Mortgage Loan Myths -- The Self-employed and Loan Qualification

One of the biggest myths about getting a home loan? 

The idea that self-employed people are automatically disqualified for a mortgage because of their employment status. While it's true that it's tougher for some in the early stages of a small business to make ends meet, being self-employed is not the kiss of death on a home loan application.

Proof of this can be found on the our websites offering a loan checklists which include advice on what to submit if you are self-employed. The notion that you can't qualify for a home loan if you work for yourself is rubbish. 

That said, it can be more difficult for some small business owners to qualify for a home loan for one simple reason; not keeping good records. You may be quite successful in your small business or as a freelance contractor, but if you can't show on paper that you have a consistent income, the lender can't conclude that you are a good risk.

Your loan application requires you to show not only that you were gainfully employed, but also what your net income was compared to business expenses. Self-employed people will also need to show a profit-loss statement. If you don't keep good records of legitimate business expenses, don't have your taxes professionally prepared, and guesstimate your profits and losses, the loan process could come to a halt very quickly for you. The question your loan officer will ask goes from "Can you afford your monthly home loan payments?" to, "How long until my applicant needs some kind of homeowner bailout program?"

This is why self-employed people should take plenty of extra time when planning to buy a home. For some, the average prep time could be about one year-especially if there are issues with credit repair or disputes on credit reports to deal with. For a self-employed person, showing reliable income for two years is a very good way to make conditions as favorable as possible to get approved for a mortgage.

That means solid record-keeping, an aggressive approach to finding (and keeping) steady work, and paying strict attention to your taxes. Remember that unlike those with traditional careers, there's an additional layer of scrutiny to the ebb and flow of steady income. If you went a long period between contracts, or if your business shut down for a time, your loan officer will want to know why and whether such periods of inactivity could happen again or how they affect your ability to make your mortgage payments.

Is it more difficult for self-employed people to get a mortgage? Yes. Is it impossible? Absolutely NOT, but you need to plan for extra scrutiny to your personal bottom line, keep good records, and be able to show your loan officer that you are indeed a good risk.