How to Get a Mortgage When You’re Self-Employed
Getting a mortgage when you're self-employed can be more challenging than it is for traditional W-2 employees, but it's absolutely possible with the right preparation. Since you don't have standard pay stubs from an employer, lenders just need sufficient documentation to verify your income. Here are some tips for qualifying for a home loan while self-employed.
How to get a mortgage when you’re self-employed
Establish a solid income history
Most lenders want to see at least two years of steadily increasing self-employment income. They'll typically ask for your federal tax returns (personal and business) for the past two years to verify your self-employment income. The more years of documentation you can provide showing rising revenues, the better.
Maintain a solid credit score
A low credit score is always going to affect your ability to qualify for loans at decent rates. And with other forms of income less clear-cut, your credit score carries extra weight for proving your creditworthiness. Most lenders require self-employed borrowers to have credit scores of at least 700.
To keep your credit score high, pay all bills on time, keep credit card balances low, and avoid new large debts before applying.
Minimize your debt-to-income ratio
Lenders calculate your debt-to-income (DTI) ratio by adding your total monthly debt payments and dividing by your gross monthly income. With fluctuating self-employment income, you'll want to keep this DTI below 43% to qualify. That may mean paying down debts before applying.
Minimize your write-offs
It may be tempting to write off every possible expense to minimize your taxable income, but that could backfire when trying to qualify for a mortgage. Lenders want to see maximum income to ensure you can repay the loan. If you're eyeing a mortgage this year, avoid writing off more expenses than absolutely necessary.
Be prepared with documentation
Beyond at least two years of tax returns, have paperwork ready documenting your self-employment income sources like 1099s, profit/loss statements, quarterly tax payment records, business licenses, client invoices, and more. The more you can document, the better.
Get pre-qualified and compare lenders
Get pre-qualified with several lenders to compare rates and requirements. Meet with local banks, credit unions, and specialized self-employment lenders. You can absolutely qualify for a mortgage as a self-employed borrower—being organized and having good records will make the process smoother.