If you’re ready to pursue buying a home, but you’re self-employed, you might be wondering how the process will differ for you. A lot of the information you find online might not apply in your scenario, as someone who is financing ready for homeownership but doesn’t have a typical income source or W-2 verified income.
The good news is, we have become experts in finding financing solutions that work for self-employed borrowers, and we can help you too. Contact us any time to learn more about the options available to you, or keep reading for information that might answer your questions.
How a Self-Employed Borrower Differs from a W-2 Employee
The main difference lies in how your income is verified. Traditional employees receive W-2 forms from their employers, which makes it easy for lenders to confirm their stable income. For self-employed individuals, income often comes from multiple sources, and it can vary month to month. This variability requires us to dig deeper into your financial situation to assess your ability to qualify for the loan.
Additionally, self-employed borrowers often take advantage of tax deductions to reduce taxable income, which can make it appear on paper that they earn less than they actually do. While this is great for lowering your tax bill, it can complicate your mortgage application since lenders base your borrowing power on your reported income. If that sounds like you, don’t worry. While your W-2 might not fully reflect your financial strength, there are other ways to qualify.
What are Lenders Looking For?
No matter your source of income, lenders are essentially looking to answer one question: does this borrower have the income and assets to support the mortgage they are applying for? Answering that question may be a little more straight forward for an employee, but a self-employed person can still qualify.
These are factors underwriters will look at to decide if a self-employed borrower is able to repay a loan:
- Length of self-employment: Generally speaking, we prefer borrowers who have been self-employed for at least two years. This track record demonstrates that your business is stable and that you can maintain a steady income. If you’ve been self-employed for less than two years, you might still qualify, but you’ll likely need to show significant experience in your industry or other sources of consistent income.
- Consistent income: We want to see that your income is reliable and stable over time. Large fluctuations in your income may raise red flags, so you’ll need to provide documentation that demonstrates a consistent (or growing) income trend. In some cases, new contracts or long term clients may be a part of this process.
- Credit Score and DTI: Just like any other borrower, your credit score and debt-to-income ratio will play big roles. A strong credit score is always important, but it can carry extra weight if you’re self-employed. A higher credit score indicates to lenders that you’re a responsible borrower, which can help offset the perceived risk of fluctuating income. The same is true of a low DTI.
Documentation for Self-Employed Borrowers
We often recommend a bank statement loan for our self-employed borrowers. These mortgages are approved based on your bank statements, allowing you to skip the process of providing tax documents and other paperwork. Some borrowers do prefer to apply for other mortgages, as well. In any case, these are some of the documents you’ll want to have ready when you apply:
- Tax Returns:
Most lenders will require two years of personal and business tax returns, including all schedules. These documents help to assess your true income. - Profit and Loss Statements:
If you own a business, you may need to provide a year-to-date profit and loss (P&L) statement. This helps us understand your business’s financial health. - Bank Statements:
Personal and business bank statements can help show consistent cash flow and savings. If you’re applying for a bank statement loan, this will be the bulk of your documentation for the application. - 1099 Forms:
If you work as an independent contractor, you’ll need to provide 1099 forms to document your earnings. - Client Contracts or Letters of Employment:
If your income comes from specific clients or contracts, providing these documents can help demonstrate future income stability. - Business Licenses:
Proof of your business’s legitimacy, such as a business license or registration, may also be required.
While the process may be more complex, getting a mortgage as a self-employed individual isn’t necessarily harder—it just requires more preparation and documentation. If you’re ready to apply for a mortgage as a self-employed borrower, we can help. Reach out any time to learn more!
