How to get a mortgage when you’re self-employed
What You'll Learn: What you need to know about getting a mortgage as a self-employed borrower.
EXPECTED READ TIME: 6 MINUTES
Did you know that as many as 15% of Americans are self-employed? That’s a pretty big chunk of our population. And yet, if you’re among them, you know how needlessly complicated some tasks can become — from filing taxes to applying for loans. And high on that list of difficulties is the act of getting a self-employed mortgage. Without the easily accessible forms and files from a company’s HR department, those who work for themselves need to keep track of everything on their own.
But there’s good news: The process isn’t as complicated as you might think. With a little preparation, documentation, and organization, you’ll be on the right track to a new home in no time.
Are you self-employed?
It may seem straightforward, but the first step in applying for a self-employed mortgage is checking whether you really are 100% legally self-employed. It sounds easy, but the exact definitions can be surprisingly detailed.
According to the U.S. IRS code, you’re considered self-employed if you can prove that you are in at least one of the following categories:
- Sole proprietor
- Independent contractor
- Partner of a company
- Gig-worker
- Part-time owner/operator
You don’t have to make all (or even most) of your money through these ventures to be considered self-employed. But you do have to fit into one of those categories. Driving for a rideshare company? You’re considered an independent contractor — you’re self-employed. Setting your own hours as a professor at a university? You may feel like a gig worker, but you’re on their payroll — you’re not self-employed.
A good rule of thumb is checking if you get sent a W-2 form for your taxes. That’s usually a sign that you are not self-employed. And when in doubt, consult your contract. That will define your role in clear terms.
Self-employed mortgage requirements
Now, if you can tell for sure that you are officially categorized as a self-employed worker, you’ll need to prove that to your mortgage lender so they know they can trust you to pay back the loan. This means gathering your documents and laying out your case that your money comes from the fruits of your labor. Don’t worry — this sounds much harder than it is.
This is where being organized comes into play. You’ll want to make sure all of your documents are properly sorted and accessible. Keep them well filed and in good condition, and you’re already halfway there. Staying up to date with a simple spreadsheet or checkbook can go a long way.
Verification of self-employment for a mortgage
But what documents do you need to keep track of when getting a mortgage? For employees, the answer’s easy: your pay stubs and W-2s are usually a good place to start. For those who are self-employed, the answer runs a little deeper. Typically, mortgage lenders will like to see a steady stream of income — proof that you’re a trustworthy borrower. Here are just some of the documents they may require as evidence:
- IRS transcripts
- Business tax returns
- Personal tax returns
- Business bank statements
- Self-employed proof of income
- Profit-and-loss reports
- CPA letter
The exact requirements will vary depending on your lender, but as a rule of thumb, the more of these documents you have, the better your odds of getting a mortgage. But don’t just show up to your bank with a stack of every invoice you ever earned! A well-rounded supply of documentation will ease your lender’s mind and prove your merit. And tax documents are especially important because they already bare the government’s seal of approval.
Find the best lender for self-employed borrowers
Now, the next part of the process is the same no matter where you get your paycheck. You’re always going to want to shop around to find a mortgage lender that fits your needs. It’s not always optimum to just go with whoever your real estate agent recommends. You need to do your own research and see what’s out there.
This is doubly true for self-employed workers. Not every lender is equally familiar with the unique needs and situations of this entrepreneurial sect. You need to make sure your lender understands your business as well as they understand a typical 9-to-5er. Ask them questions about their experience working with self-employed people. And if they’re not satisfying you with their answers, it’s best to keep looking. The Internet is vast!
Self-employed home loan options
There are plenty of options beyond traditional conventional mortgages that can offer greater flexibility for self-employed people. They all have unique requirements, but they may require less stringent documentation.
Some examples include:
- FHA loans. These government-backed loans are designed to make first-time homeownership accessible to a wider population. That means the requirements will be a little bit less demanding in most cases. And your down payment could be as low as 3.5%.
- VA loans. If you’ve served in the military, a VA Loan is almost always the best choice. In addition to an easier process, you’ll also enjoy lower rates, more flexible demands, and a down payment as low as 0%.
- Non-conforming loans. Most loan options need to conform to standards set by a government-sponsored enterprise like Fannie Mae or Freddie Mac — but not all. Typically reserved for higher-amount borrowing, non-conforming loans could be a good choice if you’re going after a larger home. It depends on the lender, but there’s a good chance they’ll be more accepting of a broader range of documentation.
Remember to be open and honest with your lender and your real estate agent so that they can help guide you to the loan option that will work best for your unique situation.
Reap the benefits of working for yourself!
One of the best things about working for yourself is the freedom to set your own hours, goals, and limits. It’s the ultimate dream of flexibility and individualism! Of course, there are challenges unique to this path, but they’re not insurmountable. With the right determination and a little organization, you can accomplish anything you want. Just remember to bring that same spirit to the mortgage hunt, and you’ll be in great shape.