Can I get a home loan if I’m self-employed?

June 7, 2022
Posted in Programs
June 7, 2022 derekevansteam

Proof of a stable and sufficient income is crucial in securing financing to buy a home. However, when you’re someone who is self-employed, the logistics of that can get messy. Lenders will need to verify that you have a consistent source of income so that they are assured in your ability to make the monthly payments on your loan. Additionally, there are some extra steps and documents needed when you don’t have any W-2’s for proof of income. However, we’ve helped tons of self-employed buyers secure loans, and it’s entirely possible with the right guidance. Here’s how.

What you’ll need

Lenders will want to know things like the location and nature of your self-employment, the financial viability, and the ability of your self-employment to continue to generate income. In order to verify these things, these are the documents you’ll need:

  • Your tax returns
  • Your bank statements
  • Profit and loss statements (Schedule C, Form 1120S or K-1, depending on your business structure)

You can still get a mortgage on your home, even if you’ve been self-employed for less than two years. Ultimately, your business must be active for a minimum of 12 consecutive months, and your most recent two years of employment (including non-self employment) must be verified.

What you can do to prepare

There are a few things you can do to make the process easier on yourself. 

Increase your credit score. Now more than ever, it’s crucial to have a good credit score when you start looking for a home to buy, especially if you’re self-employed. Your credit score demonstrates how trustworthy you are as a borrower for various types of loans. The higher the credit score, the better deals you’ll be able to get when applying for loans. Luckily, we have this handy guide on how to increase your score.

Consider offering a larger down payment. If you can swing it, being able to put more money down will be more attractive to lenders. The more equity in a home upfront, the lower the risk. 

Adjust your debt-to-income ratio. Your debt-to-income ratio (DTI) is a big factor in how much you can qualify for with a loan. The narrower the gap between what you owe in loans vs the income you’re bringing in every month or year, the less appealing you’ll be as a loan candidate to underwriters. This is why it’s important to stay on top of paying off debts and avoiding taking on any big loans if you plan on purchasing a home in the near future. You can also improve in this area by increasing your income. Obviously this is a more challenging angle, but as a business owner or freelancer, this will be more achievable for you than someone who works for a company and is limited by a set salary. 

Consider a co-borrower. Applying for a joint mortgage with a spouse, partner, or essentially anyone who will be investing in the property alongside you will help. Your co-borrower will also need to have an attractive DTI and good credit, but if they are a W-2 employee with a verifiable steady income, lenders will see that as a big plus. 

Getting a loan when self-employed is easier than you think!

As long as you have the documentation to back it up, lenders will see that you are a trustworthy borrower that is able to make payments on time. There are some extra hoops you may have to jump through that W-2 employees do not, but chances are it’s worth it for you. We are always available to answer your questions and help you kickstart the loan process, so give us a call or shoot us an email.