Getting a Mortgage When You’re Self Employed

Getting a mortgage can be a difficult process, and getting a mortgage when you’re self employed even more so. Lenders look at a number of different factors when determining whether to offer you a loan and what the terms of that loan should be. And one of the biggest factors is the reliability of your income. If you’re a business owner, freelancer, or other type of self employed worker, you’ll have to be able to prove to the bank that you’re not a risky investment—and that’s sometimes easier said than done.

Still, getting a mortgage when you’re self employed is far from impossible. Here’s what you’ll need to know to navigate the mortgage process without a W2.

What Lenders Are Looking For

The reason that getting a mortgage when you’re self employed is often such a tough hill to climb is that, on its face, a self employed income isn’t as verifiable as one that’s backed by a contracted salary. Banks will have questions about just how secure your prospects are, as well as what they can expect from your income moving forward.

A major determining factor here is your credit score, which isn’t affected by your self employed status. However, it’s not the only thing lenders are looking at. Your income is just as crucial, and can make the difference between getting a good loan at a good rate and not getting a loan at all.

When it comes to proving the viability of your income, lenders are looking at a few major factors:

• • The demand for your business (The state of the industry, including unique variables like location and profit potential)
  • The financial history of your business (How much money have you made from your business in the past?)
  • The financial stability of your business (Do you make relatively the same amount year to year, or is your annual take-home pay extremely variable?)

  The big question they’re getting at here: Will your business enable you to pay back your loan? That is, after all, their primary concern.

  Also taken into account will be your debt-to-income ratio, which is the amount you make versus the amount that you owe toward things like credit card debt and student loans. (Or more specifically: monthly debt-related payments divided by monthly income.) If your ratio is favorable—43% or less—then you’re in a much better spot for getting a mortgage.

  How to Prove Reliable Income

  A full-time salaried worker gets an annual W2 that states, in clear terms, how much they’ve made in each of the years leading up to their loan application. A self employed worker on the other hand is usually juggling multiple 1099s, as well as clients with whom they don’t file a 1099 at all and record income manually. And so when it comes to getting a mortgage when you’re self employed, instead of just one tax form it’s a whole cache of documents that need to be produced showing not just current wages but enough information to predict future wages as well. It’s a lot; but hey, nobody ever said that mortgage applications are fun.

  To prepare for your application, gather the following documents:

  Income documents: 1099s, state and federal tax returns, bank statements.

  Asset documents: Any documentation of investments and other assets, including retirement, savings, and stock accounts.

  Debt documents: Federal 1098 student loan tax forms, credit card statements, auto loan statements, credit scores, rent or mortgage checks, etc.

  For most lenders, you’ll need to show at least two years’ worth of documentation. This helps with proving the stability of your income, since if you’ve made a consistent amount for two years or more then they can have more faith you’ll continue to make the same.

  Keep in mind that only taxable income will be considered. If you’re telling a potential lender that you’re bringing in $5,000 a month but your bank statements and tax forms only show $4,000 a month in income, it’s the latter number that’s going to count. Likewise, they might not consider “windfall” income like an inheritance, because even if it was taxed it’s still not something you—or they—can expect you to earn every year.

  The Process for Getting a Mortgage When You’re Self Employed

  Extra documentation aside, the process for getting a mortgage when you’re self employed is the same as it would be if you were employed by someone else. As always, we recommend that you start this process early and that you get a mortgage pre-approval, which makes you much more attractive as a buyer.

  It all starts with your application. This is usually done either online or in person, and includes a series of questions designed to answer all of those questions the bank wants to know about your income, credit history, and debt. In most cases, your answers are fed into an automatic underwriting system, which, in a matter of just minutes will either say you’re approved for a loan, unapproved for a loan, or need to go through a more intensive human underwriting process.

  Whether it’s by a person or by a machine, you’ll need underwriter approval in order to move on to the next step, which is when your supplied documentation is used to “prove” your answers to the questions asked. This is always done by a real human, and may include requests for even more documents, such as a business license or specific certifications. Once you pass this step you’ll have full mortgage approval and will be able to close on your loan.

  Getting the Best Terms

  As for what terms you’ll face, you can still get competitive interest rates when you’re self employed. So long as your income is verifiable and consistent and your debt-to-income ratio is in a healthy place you should have no trouble tapping into the same rates that everyone else with similar financial credentials gets.

  If you’re struggling with getting a mortgage when you’re self employed, you may want to consider working with a mortgage broker. While they’re not free to use (expect to owe about 1% to 2% of your final loan amount), a mortgage broker can help you figure out exactly what you need to do and how to do it, and may be able to get you better terms.

  Another way to get better terms on your mortgage is to put more money down to start. And of course, a great credit score certainly doesn’t hurt. You may also want to—or be required to—bring on a co-signer.

  Get in as good of a financial spot as possible before applying for your mortgage. Taking the time to pay off debt, build up savings, and establish consistency in your income will go a very long way toward making you a less risky investment with a mortgage provider. The more you can do to show that you’re a capable self employed borrower the easier the process is going to be.

  Altogether, set aside at least a week for getting an approved mortgage. That includes the time that you’ll need in order to get all of your documents in order, as well as the time spent working with an underwriter. If you’ve got a good business and the documentation to prove it, you won’t have anything to worry about.