How do I get a home loan if I’m self-employed?
Thanks to new, more flexible guidelines, there are now more opportunities for self-employed borrowers to purchase a home, buy an investment property, refinance or get a cash-out refinance on an existing property. And even though it may be a little more challenging to get a home loan as a self-employed borrower, you still have many mortgage options.
As a self-employed borrower, you will be required to provide more documentation than a traditional borrower, but as long as you are organized, you shouldn’t have an issue qualifying for a home loan. Depending on your situation, here’s a sample list of what you may be expected to provide:
- Income documentation such as a 1099 or tax return
- Savings, retirement and/or investment balances
- Outstanding debts
- List of assets
- A business license
- Statement from your CPA
- Employment history, including past W-2 employment and current self-employment
- Authorization to perform a credit check
The lender’s calculations in determining the loan-worthiness of a self-employed borrower can be a little challenging to understand. It’s important to note that when you are applying for a home loan, the lender will only consider your taxable income. A lender will look at your taxable income and then add back in deductions, such as depreciation of business equipment. The reason they do this is because certain deductions, such as the aforementioned depreciation, don’t actually come out of your pocket. On the flip side, the lender may not include income that seems out of the ordinary, such as a larger than normal sale, as they look more to your average income over time. In general, the lender will average together the last two years of income to determine your monthly qualifying income.
How do I qualify for a home loan as a self-employed borrower?
Typically, you will need to show that you have been self-employed for at least 24 consecutive months. However, some lenders offer programs that only require 12 months of self-employment. You may also need to provide at least one year of tax returns. It’s important that any proof you are asked to provide shows income consistency. Patterns of irregularity or no income are red flags to a lender.
Additionally, your debt-to-income (DTI) ratio is important in determining if you qualify for a home loan. Most lenders will only lend to self-employed borrowers with a maximum DTI of 43%. However, if you have a great credit score and exemplary financial track record, a lender may consider going to a maximum DTI of 50%.
I have a side job that supplements my regular income; do I need to provide this information when applying for a loan?
This is one of the biggest misconceptions that exist when applying for a home loan, especially for gig workers. If you have a regular W-2 job or if you are self-employed, you do not need to include information about your side job if your regular employment will meet the income requirements of your loan. Here’s an example:
Y0u have a full-time freelance business designing websites for small companies. You are a 1099 employee for each company that you build a website for. You have been doing this business for three years and your income has been consistent. However, you also decide to drive for a ridesharing company on the weekends to save up for a trip to Europe. Do you need to disclose this income to the lender?
In short, the answer is no. If you have earned enough consistent income through your website-building business to meet the requirements of your loan, you don’t need to disclose your rideshare job since this income will not impact your ability to meet the loan guidelines. This is also true for traditional W-2 workers who take on a side job providing rideshare or food delivery services.
This also applies if your co-borrower is self-employed. If the first borrower is able to satisfy the loan requirements with their income, you may not need to include the co-borrower’s self-employment income, especially if their business is newer and not generating consistent income that would help supplement the loan application.
It is also recommended that self-employed borrowers do not mix business expenses with personal expenses. One or the other could negatively impact your credit score and it could also dilute the profit and loss statement for your small business.
Because of the intricacies of applying for a home loan as a self-employed borrower, it’s important to work with a lender who has experience handling self-employed mortgage applications. Complete our pre-qualification form and we will connect you with a lender who is experienced in working with your unique situation.