How to Get a Mortgage as a Self-Employed Individual

Securing a mortgage as a self-employed individual can be daunting due to the complexities and challenges not faced by borrowers with traditional income streams. Salaried employees can easily showcase a steady income, but the self-employed often deal with fluctuating income and must provide more extensive documentation. 

This article aims to demystify the process, provide practical steps and insights to guide self-employed individuals through the mortgage process and highlight how the process differs from traditional loan underwriting.

How Getting a Mortgage is Different for Self-Employed Individuals

For self-employed individuals seeking a mortgage, the process can be a bit more complex than for those with a traditional W-2 income. While W-2 income is generally easier to underwrite, self-employment income requires additional steps to verify income and ensure that the borrower has the ability to repay their loan. Underwriting for self-employed mortgages often takes longer than conventional mortgages designed for W-2 employees. 

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

The key to qualifying for a mortgage as a self-employed individual is to demonstrate to lenders a consistent income, good credit, and a low debt-to-income ratio. It’s important to show your lender that you meet their requirements, provide supporting documentation, and be responsive when working through the application process.

Loan Application Process

The loan application process varies by lender. However, these are the general steps to get a self-employed mortgage.

1. Initial consultation: The first step in the application process for a self-employed person is a consultation with a mortgage broker or lender. You’ll discuss your financial situation, credit rating, and goals during this initial meeting. This is also an opportunity to ask questions about the loan process or any particular types of loans that might be a good fit for you.
2. Document preparation: After the initial consultation, you’ll need to gather documents to verify your income, identity, and other things. As a self-employed individual, this often includes tax returns for the last two years, profit and loss statements, business bank statements, and other items. 
3. Loan pre-approval: Once you’ve submitted all necessary documentation, the lender will review your information and determine your borrowing capacity. If approved, you will receive a pre-approval letter that indicates how much you’re qualified to borrow. This can be a great tool when house hunting, as it shows sellers that you’re a serious buyer and can close.
4. House hunting and loan selection: With your loan pre-approval in hand, you can start shopping for your dream home. Once you find a property and have an accepted offer, you’ll work with your lender to finalize the loan details.
5. Underwriting: The final phase is the underwriting process, where the lender verifies all the information you provided and assesses the risk of the loan. For self-employed individuals, this step can take a bit longer due to the complexities of verifying self-employment income. If everything checks out, this is where you’ll receive final approval for your mortgage.

Typical Loan Requirements

The requirements to get a loan as a self-employed individual are largely the same as those of full-time employees. The key difference is how certain requirements are met and the documents supporting your application. 

Here are some of the basic requirements to get a mortgage:

• Proof of income: This is a critical requirement for all mortgage applications, but it can be a bit more complex for self-employed individuals. You must provide tax returns, financial statements, and possibly a profit and loss statement for your business.
• Good credit score: A high credit score indicates a lower risk for the lender. It shows your financial responsibility and ability to repay your debts on time.
• Down payment: Generally, a larger down payment can enhance the chances of securing a mortgage as it reduces the loan-to-value ratio. This is especially important for self-employed individuals whose income might fluctuate.
• Debt-to-income ratio: Lenders assess your total monthly income against your monthly debts. A lower debt-to-income ratio (under 30%) is preferable as it signifies you have a good balance between income and debt.
• Business stability: If you’re self-employed, lenders will want to see that your business has been stable and profitable for at least two years. This provides reassurance that your income is reliable.
• Reserves: Having substantial savings or assets can make you a more attractive borrower. It shows lenders that you have a financial cushion should your income decrease.

Documents Required to Qualify

Self-employed mortgages usually require more robust documentation than traditional loans. Still, the right documents can show your lender you have a stable income and can repay your loan. Below is a list of the essential documents you’ll need to present to your lender as part of a self-employed mortgage application:

• Tax returns: You must provide your personal and business tax returns for the past two years. This helps lenders evaluate your annual income.
• Bank statements: These demonstrate that you have the funds for the down payment and closing costs and that you have sufficient income or assets to repay the loan.
• Profit and loss statement: A current year-to-date profit and loss statement gives lenders a snapshot of your most recent business income and expenses.
• Business verification: This could be a state business license or a Doing Business As (DBA) form that verifies you have a legitimate business.
• Balance sheet: This document shows your business’s assets, liabilities, and equity. It can demonstrate your company’s financial stability.
• Debt schedule: This is a comprehensive list of your outstanding debts, including loans, credit cards, and other liabilities. This document will help lenders determine your debt-to-income ratio.

Gathering these documents in advance can streamline your mortgage application process, making it easier for lenders to assess your financial picture. As a self-employed individual, meticulous financial recordkeeping will make navigating the loan process more efficient and, ultimately, more successful.

Tips to Qualify for a Mortgage as a Self-Employed Individual

Navigating the mortgage process can be challenging if you’re self-employed. These tips are designed to help prepare you for the mortgage application process, improve your financial profile, and increase your chances of approval. 

• Work on your credit. A good credit score demonstrates financial responsibility and can positively impact your mortgage application.
• Lower your debt-to-income ratio. Pay off as much debt as possible before applying for a loan. Doing so can increase your credit score and improve your approval odds.
• Start saving a down payment. Increasing the amount you save over time can help demonstrate financial stability when applying for a loan. Have more cash than you would expect for a conventional loan, both for the down payment and to show you can pay the mortgage for several months if income falls.
• Document your business income. Keep separate books for your business and personal finances, and document any income you earn as self-employed. If your company is incorporated, it also helps to shield you from personal liability resulting from your business operations.
• Gather documents early. When it comes time to apply for a mortgage, have everything ready to go. Gathering documents in advance will help speed up the loan application process.
• Know your limits. Use online calculators to conservatively estimate your income and borrowing limit before applying. Be honest in your application and provide accurate information. Lying about your income or assets can have serious legal and financial repercussions.
• Apply early. Don’t wait until you have a home under contract to apply for a mortgage. The process often takes longer than 30 days, so start as early as possible and get a pre-approval letter to improve your chances of having an offer accepted on a home.
• Talk to an experienced lender. A knowledgeable mortgage professional can help you understand the loan process, provide personalized advice, and guide you through each step of the application process.