GETTING A MORTGAGE WHEN YOU’RE SELF-EMPLOYED

Getting a Mortgage When You're Self Employed

10 Dec, 2021

When you’re self-employed, you may feel like you have fewer opportunities to secure a mortgage. If you can’t verify your income with a W-2 and paystubs, how do you prove you make enough to qualify for a mortgage? 

Fortunately, there are plenty of opportunities for the self-employed to secure a mortgage. You just have to know how to qualify and how to show lenders you’re a good risk.  

How to Qualify for a Mortgage when you’re Self-Employed 

Even if you’re self-employed, you can show lenders that you can afford a mortgage. It comes down to showing stability in your income and that you can handle a mortgage obligation. Lenders look at the risk factors and the likelihood that you’ll be able to pay the mortgage back on time. 

While you may not get a mortgage when you’re newly self-employed, after just a couple of years of steady employment, you could be well on your way to securing a mortgage. 

Here’s how to qualify. 

Show Stability 

The largest risk lenders take when you’re self-employed is the lack of stability. When you work for someone you get a steady paycheck. When you’re self-employed, though, your income isn’t as certain. 

If you can show income stability and steady business growth, though, you’ll be a good candidate for a self-employed mortgage. 

Show Proof that you can Succeed in the Business 

Lenders like it when you have a history in the business you started. For example, if you worked in the accounting field and then started your own CPA business, you have the experience necessary to succeed at your business. 

On the other hand, if you worked as a teacher and then decided to open your own CPA business, lenders would have a harder time seeing how you’d succeed. 

Keep your Credit Score Up 

Your credit score is an important part of the approval process. It’s the first thing lenders look at when deciding if you’re a good risk. Since you’re self-employed, lenders want a higher credit score to prove you are financially responsible.  

Even though starting a business can be taxing on your credit, do what you can to make your payments on time, keep your credit balances down, and don’t apply for new credit unless it’s necessary.  

Put Money Down on the Home 

Many loan programs don’t require a down payment or if they do, it’s low. If you’re self-employed, though, lenders look at you as riskier. The more money you can put down on the home, the higher your chances of approval. 

For example, FHA loans require just 3.5% down, but if you put 5% - 10% down, you show lenders that you are a good risk and are willing to invest your money in the home too.  

Documents Needed to Get a Mortgage when you’re Self-Employed 

When you’re self-employed, you must show lenders you’re a good risk. Here are the documents they need. 

  • Income – You must prove your income. This is how you show you can afford the loan and can pay it back on time. Since you’re self-employed you won’t have pay stubs, so instead, lenders require two years of tax returns. You must provide all schedules too.

You can also provide proof of receipt of your income by providing your bank statements. Include all pages of your statements and provide both personal and business bank statements if you have separate accounts. 

  • Assets – Since you’ll need to make a down payment, you must prove you have the assets. Lenders like to see the last two months of bank statements to ensure you don’t have any large deposits from funds that don’t belong to you. 
  • Prove your right to do business – You must provide proof of your ability to run the business. If your municipality requires a business license, you can provide it. If not, you can get a letter from your CPA stating that you’re self-employed and that the income you reported is accurate. You can also provide a copy of your business insurance for proof. 
  • Year-to-date profit and loss statement – Lenders also want to see your income year-to-date. A current year P&L will show if your income is on target to make the same money as the last two years.  

Tips to Improve your Chances of Approval when Self-Employed 

Because self-employed borrowers are riskier than those employed by a company, you may need some compensating factors to get approved.  

Here are a few ways to ensure you get approved for a loan: 

  • Improve your credit score 

Pull your free credit reports and make sure you don’t have any negative credit. If you have late payments, bring them current. If you have collections, take care of them. Do what you can to get your credit score as high as possible before you apply.  

  • Pay down your debts 

If you have a lot of consumer debt, pay it down. The lower your debt-to-income ratio is, the more likely you are to get approved.  

  • Save a large down payment 

Put as much money down as you can. A larger down payment gives you ‘skin in the game’ and makes lenders more likely to lend to you.  

  • Keep your income as steady as possible.

Even if you own a seasonal business, keep your income as steady as possible to show lenders that you are a good risk. 

Final Thoughts 

Today it’s easier for self-employed borrowers to get a mortgage. While you have to prove you can afford the loan beyond a reasonable doubt, there are plenty of ways to get approved and plenty of mortgage programs to choose from to help you get the financing you need to buy a home. 

Contact us for a no-obligation conversation. Valley Mortgage is the largest independent mortgage lender in North Dakota and northern Minnesota. We’ve been helping folks like you for more than 38 years. If you haven’t reviewed our website, click here. Please call us at 701-461-8450 to get all the details about home mortgages and refinancing. There’s no cost, no obligation. Valley Mortgage does all the processing right here in our Fargo, ND office.