Self-Employed Mortgage Guide: How to Get a Loan in 2024

Securing a mortgage while self-employed is achievable with proper preparation. Lenders focus on income stability and documentation rather than your employment type. By maintaining a strong credit profile, providing two years of tax returns, and planning ahead, freelancers and independent contractors can successfully navigate the home loan process. This guide outlines the essential steps and documents needed to improve your approval chances.

What is considered self-employed for a mortgage? For mortgage purposes, being self-employed means you work as an independent contractor, freelancer, or gig worker and receive income reported on IRS Form 1099-NEC instead of a W-2. Lenders view you as a business owner, whether you're a sole proprietor, part of an S-corporation, or a single-member LLC. The key is demonstrating consistent, verifiable income.

What documents are needed for a self-employed mortgage application? Lenders require extensive documentation to verify your income stability. Based on our experience assessment, gathering these documents beforehand streamlines the process.

• Two Years of Federal Tax Returns: Lenders typically require personal and business tax returns for the last two years. They use the average income from these returns to calculate your qualifying income. Some conventional loans may allow for only one year of returns if you have a five-year business history.
• Profit and Loss Statements: You must provide a year-to-date profit and loss (P&L) statement prepared by you or a CPA. This document shows your business's revenue and expenses, proving ongoing operation.
• Bank Statements: Recent bank statements—both personal and business—for the last two months are standard. These demonstrate you have sufficient funds for the down payment and closing costs.
• Additional Verification: Depending on your business, you may need to provide business licenses, client invoices, or client letters confirming continued work.

How can I improve my chances of mortgage approval? Beyond documentation, several strategic moves can significantly strengthen your application.

Strengthen Your Financial Profile: Aim for a credit score of at least 620 for conventional loans or 580 for government-backed loans (FHA, VA, USDA). Lower your debt-to-income (DTI) ratio, which is your total monthly debt payments divided by your gross monthly income. Most lenders prefer a DTI below 43%. Paying down existing debt can improve this ratio.

Plan Your Income Reporting: While minimizing taxable income is beneficial for tax purposes, it can reduce your qualifying income for a mortgage. In the years leading up to a home purchase, you may need to balance write-offs to show sufficient net income on your tax returns.

Build Cash Reserves: Having several months of mortgage payments in savings after closing reassures lenders that you can handle payment fluctuations. A larger down payment, such as 20% or more, can also improve your terms and potentially eliminate the need for private mortgage insurance (PMI).

What if my mortgage application is denied? If you don’t initially qualify, don’t be discouraged. First, ask the lender for specific reasons. Common issues for self-employed applicants include insufficient income history or a high DTI ratio. You can then take corrective steps, such as:

• Waiting to Build History: If you have less than two years of self-employment history, delaying your purchase to establish a longer track record may be necessary.
• Increasing Your Down Payment: A larger down payment reduces the loan amount and the lender's risk, which can help offset other weaknesses in your application.
• Exploring Alternative Options: In some cases, using a co-borrower with a W-2 income or looking into non-qualified mortgage (non-QM) loans might be viable paths.

Key Takeaways for Self-Employed Borrowers Success hinges on preparation. Start the process early by consulting with a mortgage professional who has experience with self-employed borrowers. They can perform a pre-qualification assessment using your tax documents to pinpoint exactly what income level you need to report. Organize your financial records meticulously and be prepared to explain your business model. Finally, shop around with multiple lenders to find the best terms. By taking these steps, you can turn your homeownership dream into a reality.