Requirements for Self-Employed Mortgage Borrowers
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If you’re a small-business owner, freelancer, consultant, contractor, gig worker or otherwise report most of your income via 1099 tax form, lenders will consider you self-employed when you apply for a mortgage.
Self-employed income will likely be considered nontraditional by mortgage lenders, which means you’ll need to provide extra documentation. You can help assure lenders that you can keep up with home loan payments by following these guidelines.
Separate your business from your personal assets
In order to get a clear picture of your finances, lenders will want to understand what cash and assets are personal savings versus what’s part of your business. By keeping these accounts separate, you can limit opportunities for confusion and make it easier for lenders to understand your financial profile.
The U.S. Small Business Administration suggests the following ways to separate your business from your personal assets:
Open a business bank account.
Apply for a DUNS (Data Universal Numbering System) number, which allows you to build credit for your business independent of your own credit.
Establish utility accounts in the company’s name.
Apply for credit with a supplier or another vendor in the company’s name.
Get a business credit card.
Gather your documentation
Exact documentation requirements vary across lenders, but you’ll be expected to meet the same minimum requirements for your income, existing debt, credit score and down payment as borrowers who are W-2 employees.
Lenders will need to review documentation of your income, which may include any or all of the following:
Tax returns and 1099s.
Bank statements and profit and loss statements.
Proof of any additional income — if you’re a landlord, for example, your lender will need documentation of rental income.
Mortgage lenders may also ask to see specific materials related to the nature of your business, such as:
State and business licenses.
Proof of client relationships (such as completed purchase orders).
Proof of business insurance.
Letters from any business organizations you belong to.
A letter from your certified public accountant or tax preparer.
Your tax strategy might also affect your ability to get a mortgage. Many people who are self-employed choose to maximize their deductions because reducing your net income means that you can pay less in taxes. However, this can also make it more difficult to prove to a lender that you can afford a monthly mortgage payment. In the year before you plan to buy a house, you might consider taking fewer tax deductions to strengthen your application. After you get a mortgage, you may be able to deduct interest paid on the first $750,000 of the loan.
Build your credit score and reduce your debts
This is not unique to self-employed borrowers; anyone applying for a mortgage will improve their chances of getting their loan application approved (and getting the best interest rate offers) by growing their credit score and lowering their credit utilization. Lenders typically want to see a minimum credit score of 620 for a conventional loan, but a higher score will help offset some of your perceived risk level to lenders.
Lenders usually want to see a debt-to-income ratio (DTI) below 36%, though as a self-employed borrower, it will help if you can get this number lower. Your DTI is the total of your monthly debt obligations divided by your income.
Maximize your down payment
By making the largest down payment you can, you’ll lower your mortgage’s loan-to-value ratio. This ratio, expressed as a percentage, measures how much you’re borrowing compared with the value of the home. The lower this figure is, the less risk lenders are taking on — which makes it more likely that you’ll be approved.
You’re more likely to get the best interest rate offers by putting down as much as you can. If you make a down payment of at least 20%, you can also avoid paying mortgage insurance (PMI).
» MORE: How to save for a down payment
Consider finding a co-signer or co-buyer
If you can’t meet lenders’ requirements on your own, you might consider finding a co-signer with sufficient income and credit history to help you qualify. If you can’t make your mortgage payments, the co-signer assumes responsibility, which limits the risk to lenders. Co-signers take on this risk without having a claim to ownership or using the home as their residence.
Alternatively, you may consider co-buying the house with someone as a full financial partner. Some buyers combine their purchasing power with a thoughtfully selected friend or relative.
Find the right mortgage
Exploring your mortgage options can help you find a loan that best fits your needs and borrower qualifications.
» MORE: Best mortgage lenders
Conventional mortgages: for borrowers with a 620+ credit score
This is the most common loan type that you will find with the largest selection of lenders. You’ll typically have a choice between a 15-year and 30-year loan, which is paid back at a fixed rate (unless you choose an adjustable-rate mortgage). These loans are originated by lenders and purchased by Fannie Mae or Freddie Mac, entities that create the standards the loans must adhere to. They often require a minimum credit score of 620 and a down payment of at least 3%, though again, you’re much more likely to qualify as a self-employed borrower with higher numbers.
FHA loans: for borrowers with a 500+ credit score
These loans are backed by the Federal Housing Administration and have somewhat looser requirements than a conventional mortgage. They require a minimum down payment of 3.5% and come with a mortgage insurance obligation of at least 11 years, even if you put down 20% or more. FHA loans have a minimum credit score requirement of 500, and the home must undergo an FHA appraisal.
» MORE: Best FHA lenders
VA loans: for military borrowers
If you’re a current servicemember, veteran or qualified civilian personnel and have met length-of-service requirements, you may qualify for a mortgage backed by the Department of Veterans Affairs. These loans don’t have down payment or mortgage insurance requirements, nor do they have a specific minimum credit score. However, the higher the credit score, the greater your chances will be of getting approved for a mortgage. Like FHA loans, VA loans also require a property appraisal.
» MORE: Best VA lenders
USDA loans: for rural borrowers who meet income limits
These loans are backed by the U.S. Department of Agriculture and are available to borrowers in eligible rural and suburban areas who meet income limits. They have no down payment or mortgage insurance requirements. Be aware, however, that certain loans directly issued by the USDA can’t be used for properties “designed for income producing activities.” As a self-employed borrower, you’ll want to verify that your business won’t violate these terms. You can find eligible counties and their corresponding income limits here.
» MORE: Best USDA lenders
Non-qualifying mortgages (non-QM): for borrowers with irregular income
Non-qualifying mortgages are designed and backed by individual lenders, rather than a government enterprise or agency. These loans also don’t adhere to loan guidelines set by the Consumer Financial Protection Bureau.
They often have more flexible requirements to qualify, and are intended for borrowers who can afford monthly mortgage payments but cannot qualify for a conventional loan. For example, if the nature of your business means that your income is erratic and unpredictable, you may be a better fit for a non-QM loan than a conventional mortgage. Because the lender is assuming all of the risk, these loans also often come with high down payment minimums.
