Being self-employed should not stop you from buying a home. And it won't.
Self-employed entrepreneurs have access to the same mortgage programs and the same interest rate environment as other borrowers in today’s real estate market. So, let's look at what those options are and what you will need to have prepared to apply.
Mortgage Loan Requirements for Self-Employed Entrepreneurs
In addition to meeting standard loan program requirements — credit score, credit history, down payment, debt-to-income ration, liquid savings and assets — self-employed borrowers need to prove their income.
How to Document Self-Employed Income
Proving your cash flow as a business owner, contractor, freelancer, or gig worker can require more paperwork than for W-2 employees. In most cases, self-employed borrowers need to provide the following documents to prove their income to a mortgage lender:
- 2 years of personal income tax returns
- 2 years of business tax returns including schedules K-1, 1120, 1120S
- Business license
- Year-to-date profit and loss statement (P&L)
- Balance sheet
Most mortgage lenders require at least two years of steady self-employment before you can qualify for a home loan. Their underwriting process will consider any source of steady income, including contract and seasonal work, and will only count taxable income towards your mortgage.
Mortgage Option for Self-Employed Entrepreneurs: Conventional Loans
For my non-W2 borrowers, conventional loans, also known as "conforming loans" or "portfolio loans" are a suitable and common mortgage option.
Conventional loans can be more difficult to get since they are not government-backed — like FHA loans — and therefore stricter guidelines are set by individual lending partners. However, they will typically cost less than those government-backed loans because you will avoid paying private mortgage insurance with a higher down. Self-employed homebuyers will put at least 20% down and avoid costly the PMI that is required with FHA. The same goes for homeowners who refinance with at least 20% home equity.
Tips to Qualify for a Self-Employed Mortgage Loan
Your biggest asset is time. Planning in advance will better your odds for getting approved.
Working with a mortgage professional, accountant, or tax expert can help you with that preparation as well. From changing the way you write off your business expenses to amending previous tax returns, leaning on the expertise of others will help you be strategic in underwriting taxable income and investing in real estate.
You can check out Flagship's full Guide to Personal Loans and Mortgages and contact one of our experienced mortgage lenders today with any questions on mortgage options for self-employed entrepreneurs.