Getting a Mortgage Is Harder When You’re Self-Employed. Here’s How to Do It

An image of a person working is used to illustrate an article about mortgages for people who are self-employed. Credit: Getty Images
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The ranks of America’s self-employed are growing.

Since the beginning of the pandemic, and throughout the so-called Great Resignation, the percentage of Americans who are self-employed has continued to rise, reaching 11% of the workforce in 2022.

Many of those folks are probably interested in buying a home, but securing a mortgage as a self-employed person can be a little tricky. It’s certainly possible—and if you’re self-employed, you shouldn’t count yourself out—but you need to know how it’s different, and how to prepare.

Is It Harder to Get a Mortgage While Self-Employed?

In a word: Yes. When you’re self-employed, it’s more difficult for a lender to get a sense of your income. You can’t simply hand them your pay stubs, so the lender has to look deeper at your financial situation to determine whether you can afford the mortgage payment, and whether your income is reliable.

“Self-employed borrowers have complex income, they have non-traditional income,” says Mac Cregger, senior vice president and regional manager at Angel Oak Home Loans, which specializes in non-traditional mortgages.

The first place a lender will look to determine your income is your tax return, which presents another problem. “Almost all self-employed buyers lighten their tax burden” by using write-offs and deductions that ultimately decrease net income on paper, Cregger says.

That means self-employed individuals are often seen by lenders as “riskier” borrowers, because they appear to have low or unpredictable incomes — which, to be fair, isn’t always true.

“I’ve always found the whole thing to be a little silly, because I could be a W-2 employee and literally quit the day after I get the loan,” says Nicole Rueth, producing branch manager with the Rueth Team Powered by OneTrust Home Loans.

How to Become a Qualified Candidate and Get a Mortgage When Self-Employed

Silly or not, lenders must abide by federal lending guidelines, which mean self-employed mortgage borrowers will need to jump through a few hoops to become a qualified candidate.

“The very first thing, the moment you think about buying a home as a self-employed borrower, you need to call a lender,” Rueth says. That will give you a clear understanding of how you need to prepare your specific financial situation before applying for a mortgage.

Here’s a breakdown of what that preparation might look like:

Optimize your credit score

The bedrock of almost any financial transaction is a strong credit history.

“Credit score, at least in this country, is such a vital thing,” Cregger says. That’s because your credit score will give the lender an idea of how you have handled debt in the past, whether you are consistent with making payments. For tips on how to optimize your credit score, you can read more here.

Maintain a healthy debt-to-income ratio

Debt-to-income ratio is the portion of your monthly income that you are required to put toward debt payments. A lender will look at this number to see if you have enough income left over to handle an additional payment in the form of a mortgage.

If you’re worried your DTI ratio is too high, consider paying off some debts—like credit cards or a car loan—before applying for a mortgage.

Demonstrate steady income from your profession

This is possibly the most important thing you can do as a self-employed borrower.

“If you have the ability to generate income steadily,” Cregger says, “then you are qualified for a  home loan.”

There are different ways to prove steady income—tax returns and bank statements are the most common—but you’ll want to make sure you can back it up with paperwork.

Have considerable savings 

Building up a large savings balance isn’t absolutely necessary, but it can definitely help your case when it comes time to apply for a mortgage.

“The huge benefit of having money and savings [is that] it gives you options,” Cregger says. One option, for example, is putting down a large down payment, which will make your application stronger, and reduce the amount of debt you take on.

Offer a large down payment 

Generally speaking, the larger your down payment, the less risky your mortgage becomes for the lender. That’s because there’s less debt to pay back, the monthly payments are smaller, and there’s simply less money on the line if you were ever to default on the loan.

That all can make it easier for you to qualify for a loan, and might give you access to better terms, like a lower interest rate.

Have all documentation ready

When you apply for a loan, the mortgage professional will tell you exactly what documents you need to provide. It varies, but some of the most common requests are tax returns and bank statements, so make sure to have those ready.

“We don’t ever want to know more than we need to know,” Cregger says, but because self-employed people often have complex income sources, they might need to dig a little deeper. That could mean connecting your lender to your accountant, or providing additional proof of your income.

Show your income history

Typically, a lender will want to see a year’s worth of income history. They’re most likely going to look to your tax return for that information, Rueth says. So if you’re in the habit of using lots of write-offs, you might want to proactively change your strategy to make sure you have a tax return that shows a solid net income.

You can also prove your income using bank statements. In that case, a lender will ask for 12-24 months of bank statements to determine your average monthly income, based on the deposits you received.

Will My Mortgage Be More Expensive If I’m Self-Employed? 

It depends on the type of mortgage, but in many cases, mortgages are more expensive for self-employed borrowers due to higher interest rates.

Again, this is because lenders see these types of loans as “riskier,” and charge higher rates to compensate. That’s especially true if you pursue a non-traditional (also known as non-qualified) mortgage.

“[The interest rate] is one step higher than a traditional mortgage, and rightfully so, it’s a higher-risk loan,” Cregger says.

Mortgage Loan Options for the Self-Employed 

Make no mistake: Self-employed borrowers do still have options when it comes to the type of mortgage they use.

“Self-employed borrowers, when they apply, we look for the best product for them, we’re not immediately going to [non-qualified mortgages],” Cregger says. “If we can get somebody in the traditional route, that’s always going to be the best option for a client.”

Conventional loans

This is what most people think of when they think of mortgages. A self-employed person who shows steady revenue, and hasn’t severely reduced their net income through write-offs, can often qualify for these traditional mortgages, which offer some of the lowest interest rates.

FHA loans

An FHA loan is a type of mortgage backed by the U.S. government that boasts low down payments and looser requirements. It can be a good option for borrowers who have a lower credit score, or who can’t qualify for a traditional mortgage.

Bank statement loans 

This is a unique option that is well-suited to self-employed borrowers, because it uses bank statements (rather than W-2s or tax returns) to determine your income and eligibility.

While these loans can open the door to borrowers who wouldn’t otherwise qualify, they also are likely to have slightly higher interest rates.

Non-qualified mortgage

For those self-employed individuals that don’t meet typical debt-to-income requirements, a non-qualified loan could be a great solution. Again, they will have a higher interest rate, and probably will require more money down. 

Cregger, whose company specializes in this type of mortgage, says they are still worth considering, especially if you have been flat-out denied by other lenders.

Joint mortgage or co-signer

If your financial profile isn’t strong enough on its own, you can bring someone else into the mortgage transaction. You could take out the loan with a spouse, for example, or you could add a parent or grandparent to the mortgage as a co-signer. This adds some additional income, and credibility, to your application, and can help convince a lender to give you the loan.

Pro Tip

Don’t assume you’ll end up with a non-qualified mortgage. Talk to a professional to understand which type of loan is best for you.