How to Get a Mortgage When You Are Self-Employed

How to Qualify for a Mortgage When You're Self-Employed

The factors mortgage lenders consider when you're self-employed are essentially the same as they are for other borrowers. Lenders are concerned about the amount of risk involved in making a loan. They want to see that loan applicants have a down payment saved, good credit, liquid assets to use in an emergency, manageable debt and steady, verifiable income.

Here's a quick rundown of basic qualifications mortgage lenders are likely to review on a mortgage application:

• Credit history: Lenders review your credit score and credit report to get a sense of how well you manage debt.
• Debt-to-income ratio (DTI): Lenders assess the percentage of your gross monthly income that goes toward paying off debt, including a prospective mortgage payment.
• Down payment: The amount of upfront money you have to put down on your home demonstrates your ability to save and makes you a stakeholder in the loan.
• Savings and assets: Having at least six months' of expenses in savings reassures lenders that you're prepared for a disruption in income.
• Income: Lenders want to see steady, verifiable income. It's an indicator that you'll have money to meet your mortgage payments month after month for the life of your loan.

Learn more: The Complete Guide on How to Get a Mortgage

How to Get a Mortgage When You're Self-Employed

The steps for getting a mortgage when you're self-employed are the same as for any loan, but with additional emphasis on calculating and documenting your income. Here's how to get started—and, eventually, get funded.

1. Know Your Income

Calculating your income and assembling the documentation you'll need to prove it are an important first step, because you'll need more than a few pay stubs and an employer contact to verify employment history.

Lenders use net income—gross sales minus expenses—to determine your income eligibility. If you use Schedule C to show self-employment profit and loss on your personal income taxes, your net profit is shown on line 31. Some lenders will allow you to add back certain expenses, such as depreciation or home office expenses; clarify with your lender so you can calculate your income accurately.

Once you've pulled this information together, you'll also have a clearer picture of how much mortgage you can afford and how much you may qualify to borrow.

Learn more: Tax Deductions for Self-Employed Taxpayers

2. Gather Business Documents

Be prepared to supply documents that support the history and income stability of your business. Here's a typical list of items you may be asked to provide:

• Proof of business: A business license, business insurance documents or a letter from your accountant that indicates how long you've been in business
• Proof of income: Personal tax returns showing net business income, usually for the past two years
• Current income: Profit and loss statement that shows year-to-date sales and expenses for the current year
• Outstanding sales: Itemized accounts receivable (outstanding invoices for which you expect to be paid)
• Bank records: Business bank statements showing income, expenses and cash flow

3. Find the Right Lender or Mortgage Broker

Some lenders are a better fit than others. For example, most lenders want to see at least a two-year track record in business, but some may be willing to work with you if you have at least one year in business and steady employment prior to striking out on your own. Underwriting guidelines may be more flexible at some financial institutions than others. Rates and terms will also vary. In the end, you may need to shop around to find the best lender for you.

Not sure where to start? Working with a mortgage broker may help. Brokers work with a variety of lenders, generally at no cost to you. An experienced broker can help you zero in on loans that are right for you and may even help walk you through the application process.

4. Get Preapproved

Whether you decide to enlist the help of a broker or find your own list of lenders to try, consider getting preapproved for a loan before you start house hunting. That way, you can work through the application and approval process without pressure and go forth knowing exactly how much you have to spend.

5. Choose a Loan

Self-employed borrowers have a range of options to explore, from conventional mortgages with banks, credit unions or online lenders, to government-backed loans with low down payment requirements. Income, documentation and credit requirements can vary from one loan program to the next, even when you're working with the same lender, so don't be afraid to explore multiple options.

Learn more: How to Shop for a Mortgage

Tips for Getting a Mortgage While Self-Employed

Though there's no guarantee that you'll be approved for a mortgage, you may improve your chances by trying these tips.

Improve Your Credit

Good credit opens doors when you're applying for a home loan. The higher your credit score, the greater your chances of securing low interest rates, favorable terms and loan approval. Consider these tips for putting your best foot forward:

• Check your credit. Check your credit reports with all three credit reporting bureaus (Experian, TransUnion and Equifax) on AnnualCreditReport.com. You can also get your credit report and scores for free from Experian.
• Limit new credit applications. Wait to open new credit accounts (other than your mortgage) until after you complete the mortgage process to minimize credit inquiries on your credit report.
• Pay off debt. Paying down revolving credit card balances helps to lower your credit utilization and may raise your score.
• Strengthen your credit score. If your score needs a lift, consider using the next six months to pay your bills on time, reduce debt and take additional steps to improve your credit score. Get tips on building your credit and track your progress for free using Experian's free credit monitoring service.

Learn more: What Credit Score Do I Need to Buy a House?

Separate Business and Personal Credit

Although many business owners use personal credit to finance their businesses, establishing separate business credit and using it to pay for large purchases and manage cash flow may help with your mortgage application.

Maintaining separate business credit keeps business expenses off your personal credit cards. This keeps your personal credit utilization down, which can boost your credit score and improve your DTI.

Lower Your Debt-to-Income Ratio

Your DTI measures how much of your monthly income goes toward debt payments such as credit cards, student loans, your mortgage and auto loans. Paying down credit card debt or paying off a car loan lowers your DTI and frees up income to pay your mortgage.

Make a Bigger Down Payment

The larger your down payment, the smaller your mortgage. Moreover, having at least 20% of the purchase price for a down payment will help you avoid paying for mortgage insurance.

Additionally, a larger down payment is reassuring to lenders. It shows that you have the financial wherewithal to save money and gives you a bigger stake in your home purchase.

Consider Government-Backed Loans

Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans are insured against default by the federal government. Because they're government-backed, these loans are considered less risky to lenders, which could help you secure the loan you need.

The Bottom Line

Getting through the mortgage approval process can take a bit of work when you're self-employed. But getting approved for a mortgage isn't meant to be a snap. A mortgage is a big loan that typically takes decades to pay off. Due diligence helps lenders determine whether you're up for this commitment.

When the process works as it should, you'll be approved for a mortgage that fits your income, down payment and credit profile. If you're self-employed, you may simply have to take a few extra steps to prove your position.