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

The process for applying for and qualifying for a mortgage can be complicated. If you are self-employed, this process can become even more difficult. Mortgage lenders like the income consistency of someone who works for a company rather than for themselves. This can cause self-employed people to be viewed as higher-risk borrowers.

However, that doesn’t mean you can’t get a mortgage if you are self-employed. You can be approved for a mortgage loan if you have steady, verifiable income, a solid credit score, and thorough documentation of your financial situation. The following guide will help you through the process of qualifying for a mortgage if you are self-employed.

Who is Considered Self-employed?

The IRS defines someone as self-employed if they meet one of the following criteria:

• You carry a trade or business as a sole proprietor or independent contractor
• You are a member of a partnership that carries on a trade or business
• You are otherwise in a business for yourself (including part-time business or gig worker)

Why Is It Harder for Self-employed Borrowers to Get a Mortgage?

Because self-employed borrowers’ incomes can be more unpredictable, they will be scrutinized more when applying for a mortgage loan. 

Here are some of the reasons why a lender might not approve a self-employed borrower for a mortgage loan:

• Income volatility: People who work for a company have a steady, predictable income. While some self-employed workers have more steady income, others have fluctuations in income or even seasonal income. This makes it harder for the lender to assess the borrower’s ability to repay a loan.
• Tax write-offs: Most self-employed people try to maximize tax write-offs to limit the liability owed to the government. However, these write-offs also reduce reported income, making qualifying for a mortgage loan harder.
• Additional documentation requirements: Unlike workers who get a W-2, self-employed borrowers must prove income through tax returns, business statements, and other financial records. This complicates the process, and without these extra forms, the lender may turn down a mortgage loan.
• Lower credit score: Lenders are more willing to lend to buyers with lower credit scores who show steady income through full-time employment. For self-employed people, the credit score is more important to show the lender that they are managing their liabilities even with volatile income.
• Smaller down payment: While there are still lending options that require little to no down payment, for a conventional loan, expect to need a higher down payment to show the lender they are willing to have a stake in the new property.

Steps to Qualify for a Mortgage When Self-employed

While getting a mortgage when self-employed can be complicated, it can be easier to qualify if you are prepared going into the process. Here are the steps you should follow to qualify for a mortgage when self-employed:

1. Organize Your Business and Financial Documents

You need to have your business and financial documents together before beginning the mortgage process. While each lender will have specific requirements, here are some of the documents you may need:

• Business licenses and documents: If you have a “doing business as” (DBA) document, membership in a professional organization, or other state and business licenses, have these ready to show your potential lender.
• Separate Personal and Business Finances: This is something you should do anyway because it makes the tax-filing process easier. But having your finances separate will also help lenders have a clear picture of your financial situation.
• Personal and Business Tax Returns (Last Two Years): These are the most important documents you’ll need for the mortgage process. If your income is increasing across both years, this will strengthen your application. Some small lenders may require three years, so keep that in mind.
• Profit and Loss Statement: This document shows your income and expenses for the year to date. If you have a financial professional, have them complete this document as part of your application paperwork. If you have a Schedule C in your taxes, include this here as well. If you are in a partnership, you’ll have a K-1 statement.
• Balance Sheet: While the profit and loss statement lists income and expenses, the balance sheet reflects your business’s financial position at a point in time. It includes assets, liabilities, and equity. 
• Bank Statements: Personal and business bank statements will likely be required to show your cash flow over the last three to six months. 
• Form 1099s: If you are a contractor, these forms verify the income received. It can also give the bank an idea of expected income from a client if you still work for them.
• Supplementary Income Proof: If you have additional income sources, like rental or investment income, include them to strengthen your case.

2. Reduce Your Debt-to-Income Ratio (DTI)

Your DTI is a ratio comparing your monthly debt to your gross income. For example, if you earn $4,000 and your monthly debt is $400, your DTI would be 10%. This number is important to all borrowers, but especially to self-employed ones.

The maximum ratio borrowers will typically allow is 43%. However, this number includes your new mortgage payment. And if you’re self-employed, lenders will likely want a much smaller DTI. Try to get your DTI below 36%, including your new mortgage payment. Not only will a lower DTI increase your chances of getting approved, but it can also earn you a lower interest rate.

Here are some ways to improve your DTI:

• If you have small debts you can pay off before applying, pay those off. However, note that paying off an installment loan can cause a short-term decrease in your credit score.
• Avoid taking any new credit before applying for a mortgage.
• If you can reduce write-offs, it will increase reported income, which will also improve your DTI.

3. Build a Strong Credit Profile

A higher credit score will help you get approved for a mortgage and get a better interest rate. As a self-employed borrower, you should aim for at least a 680 credit score before applying. While you may be approved with a lower score if the rest of your application is strong, you may also pay a higher interest rate.

Here are a few ways to boost your credit score before applying for a mortgage:

• Pay all of your bills on time.
• Reduce your credit card balances to less than 30% of the credit limit.
• Avoid opening new lines of credit during the mortgage application process.
• Regularly review your credit report for errors and dispute any inaccuracies with the credit bureau. This can take time to clear up, so stay on top of your credit report long before you consider applying for a mortgage.

4. Save for a Larger Down Payment

A larger down payment demonstrates financial strength and lowers the lender’s risk. If you can put down at least 20%, you will show the lender you are willing to put a stake in the new property, making it more likely you’ll be approved. Also, you will avoid potential private mortgage insurance, which increases your monthly payment. A larger monthly payment can make meeting DTI requirements more difficult.

5. Establish Business Stability

Lenders like to see that you’ve been in business in the same field for at least two years. Factors that can help lenders see stability include:

• Consistent growth in income year-to-year. 
• Long-term contracts, client retention, or steady demand for your services.

6. Consider a Co-signer

If you cannot qualify with just your self-employment income, you may be able to get a co-signer on the loan. This person would be responsible for the loan if you could not make payments. However, unlike a co-borrower, they would not be a joint owner of the property.

Mortgage Options for Self-employed Borrowers

There are several options for self-employed borrowers looking for a mortgage loan. Each option has its own set of qualifications. While some loan types have minimum credit score and down payment requirements, self-employed borrowers may need to exceed the minimum to qualify. Discuss these options with your lender and agent before beginning the mortgage process. 

• Conventional Loans: These loans require a two-year income history. You can put down as little as 3% with good credit, but self-employed borrowers may be required to make a larger down payment. These loans offer competitive rates but often have stricter DTI and documentation requirements.

• FHA Loans: Backed by the Federal Housing Administration, FHA loans have easier qualification standards, including lower credit score requirements. With credit scores higher than 580, they can accept down payments as low as 3.5%.

• Bank Statement Loans: These loans are designed for self-employed borrowers with significant tax write-offs. Income is verified using 12–24 months of bank statements rather than tax returns. However, higher credit scores and larger down payments are often required, and not every bank offers them. You may need to work with a mortgage broker to find a lender. These are best for borrowers who cannot qualify for conventional or government-backed loans.

• VA Loans: These loans are exclusively for veterans, active-duty service members, and eligible spouses. No down payment is required, and you won’t have to pay PMI. Interest rates are very competitive.

• • USDA Loans: These loans are guaranteed by the government and are administered by the U.S. Department of Agriculture. They are primarily used on rural, single-family residences. This type of loan also doesn’t require a down payment.

• Portfolio Loans: Offered by private lenders for non-traditional borrowers, portfolio loan lenders have flexible qualification criteria but often charge higher interest rates.

Tips to Strengthen Your Application

In addition to following the steps listed above, here are some additional tips to strengthen your application as a self-employed borrower:

• Work with a Lender Familiar with Self-Employed Borrowers: Lenders who work with self-employed borrowers understand the challenges involved and likely will help you step-by-step through the process. 
• Maintain Accurate Financial Records: If your financial documents are in order, it will make it easier for the bank to have a clear picture of your financial situation and determine your ability to repay a mortgage loan.
• Limit Tax Write-Offs: Fewer tax write-offs increase your reported income, decreasing your debt-to-income ratio. 
• Explain Income Gaps or Fluctuations: It is not unusual for self-employed workers to have a gap or fluctuation in income. Be ready to explain any major fluctuations to your lender when you apply, especially if health issues or other external factors caused them. 
• Plan Ahead: Because this is a complicated process, prepare at least six months before applying for a mortgage. This will allow you to review your finances, pay down debt, and get your documents in order. 

Common Mistakes to Avoid

Here are a few things to avoid if you want to be approved as a self-employed borrower:

• Inconsistent Documentation: If you are missing documents or have incomplete records, the application process can be delayed, or you may be denied.
• Mixing Personal and Business Finances: Commingled accounts make it more difficult for the lender to see your finances clearly.
• Applying Without Preparation: If you don’t prepare in advance, you may be bringing a high DTI or a poor credit score to the table. As a self-employed borrower, you need to assume you’ll need as strong a financial picture as possible for approval. 
• Ignoring Rate Shopping: Always shop around for the best mortgage rates. If you qualify for government-backed mortgages, not only will you get a better rate, but you may also reduce the amount of money needed for a down payment. 

Bottom Line

Qualifying for a mortgage as a self-employed worker is difficult but not impossible. It requires extensive planning, strong financial documentation, and a strong, clear financial picture. If you can get your finances in order before you begin the application process, you will have a higher chance of not only being approved for a mortgage but also securing an interest rate and term that works best for your unique financial situation.