Are you self-employed and working to build a business and leave your mark on the world? Of course, we’re proud of what you’ve accomplished and prouder that your success is putting you in a position to become a homeowner. Cognizant of that, you may be asking yourself if you can get a mortgage if you’re self-employed. The simple answer is: Yes! But while self-employed borrowers are held to similar lending standards as W-2 workers, the mortgage process can be more challenging. Lenders will have to consider the viability and stability of your business along with your income since revenues can fluctuate. Keep reading to learn how to get a mortgage if you’re self-employed. 

Key Takeaways: 

• If you’re self-employed and considering buying a home, you might need to take special measures to boost your odds of mortgage application approval.
• One issue that self-employed borrowers run into is that they use business expenses to reduce taxable income, which can mean less qualifying income for the mortgage.
• If you’re a self-employed borrower, you can boost your chances of securing a mortgage by increasing your credit score, paying down debts, and offering a larger down payment. 

Why Getting a Mortgage While Self-Employed is Considered Challenging

W-2 workers are deemed creditworthy because they have steady, easily verifiable incomes. However, lenders don’t often consider self-employed persons as ideal borrowers and are required to provide more paperwork to document income when compared to conventional employees who can produce a W-2. Moreover, self-employed borrowers have business expenses. And while deducting business expenses helps you lower your taxable income, it also means lower annual income, which may cause your lender to question if you make enough money to afford a home.

The good news is that if you’re self-employed and looking to get a mortgage to buy a home, there are ways you can make yourself a more attractive borrower. 

Provide Proof of Income

Lenders want to see the amount you earn from self-employment (and whether it’s stable, steady, or increasing over time). To qualify for the mortgage, you’ll have to provide income documentation, including 2 years of personal tax returns, business tax returns, balance sheet, and year-to-date profit and loss statement. Can you get a mortgage if you’ve been self-employed for less than two years? Yes- typically, your business should be active for at least 12 consecutive months, and your most recent 2 years of employment should be verifiable. 

Provide Documentation

You can increase your chances of getting a mortgage if you’re self-employed if you show proof of your tax returns, balance sheets, profit and loss statements, and bank statements. Your lender may also ask for verification of additional sources of income, such as alimony, social security, and child support, as well as a list of assets, like savings and investment accounts. You may also need to provide a list of debts and monthly payments for your business. 

Boost Your Credit Score

A lender may reject your mortgage application or charge you a higher interest rate if you have a poor credit score. So, you should check your credit report to identify any errors you may need fixing before the lender reviews your credit. If you find any errors, contact the credit bureau to correct them. You may also want to watch out for other areas of concern, for example, high credit limit use, and work to improve them. Moreover, it’s advisable to avoid applying for new credit cards or loans months before your mortgage application as a lot of new credit inquiries could harm your credit rating. 

Optimize Your Debt-to-Income Ratio

The debt-to-income ratio, or DTI, is the percentage of your gross monthly income covering your monthly debts. A lender will pay attention to the DTI as you’re considered a less risky borrower when the ratio is low. To calculate the DTI, divide your monthly recurring debt by your monthly income before taxes. Note that fluctuating bills such as property taxes, repairs, utilities, and groceries aren’t debts and aren’t factored in when calculating DTI. If your DTI is more than 43%, and you want to secure a mortgage, focus on lowering your debts before applying for a home loan.

Have a Large Down Payment

A large down payment can increase your prospects of approval and lower your monthly mortgage payments and interest rates. Besides, it can be reassuring to lenders. A large down payment shows that you have the financial wherewithal to save cash and gives you a bigger stake in your home purchase. Keep in mind that the higher the equity in the house, the less likely you’ll walk away from it during financial strain. Hence, a lender will see you as less of a risk if you offer a large down payment. In fact, if you’re working with a lender and they’re on the fence about your mortgage application, putting extra money down will go a long way toward easing their concerns. 

Have Cash Reserves

Your mortgage payment is due every month, even when work has dried up. As such, lenders want to ensure that you have funds to cover your mortgage payment even if you were to run into a rough patch financially. Maintaining 3-6 months’ worth of expenses in savings is a wise financial move that’ll show lenders you have emergency funds ready if you hit a financial setback. 

You Can Get a Mortgage -Even if You’re Self-Employed!

While it might seem challenging you can get a mortgage if you’re self-employed. But you may want to take special measures to ensure you qualify for the mortgage. And if you’re ready to buy a home, consult our real estate pros. We’ve been helping buyers find and buy their dream homes for years, and we’d love to do the same for you. Contact us today, and we’ll ensure your homebuying experience is smooth and seamless!