How to get a mortgage for self employed clients

Updated: June 07, 2024

Self-employed borrowers in the United States are not so different from the usual types of borrowers. They face the same grueling mortgage process and sometimes, even rejection.

Home mortgage for self-employed individuals have similar financial preparations. If you are self-employed, your initial action must be showing your financial history in the best possible light for mortgage lenders. Employed borrowers should also prepare for the same.

However, there are still some differences particularly when it comes to one’s source of income. Mortgage companies tend to be extra meticulous about self-employed mortgage applicants, especially how and where they get their money.

In this article, we will discuss everything you need to know about home mortgage loans for self-employed borrowers. For mortgage brokers, this guide can serve as an educational piece for your self-employed clients or potential leads. Share this with them!

Is it harder to get home mortgages for self-employed borrowers?

A straightforward answer to this question is yes, self-employed individuals struggle more than the typical borrower. It can also be harder to get approved for mortgage than if you have an employer. This is because it is more difficult for mortgage lenders to get a sense of your income.

When you are employed, you can simply show lenders your pay slips. When you are self-employed, lenders must look deeper into your finances to identify if your income is reliable and if you can afford mortgage payments.

Lenders often see self-employed buyers as being risky borrowers because lenders look first at tax returns to determine income. It is an open secret that most self-employed homebuyers lighten their tax burden by using deductions and write-offs to decrease their net income on paper. As such, lenders see them as having unpredictable incomes.

Still, being self-employed is in no way indicative of having an unreliable income. For instance, even employed homebuyers can quit their employment after receiving the mortgage. Keep in mind that mortgage lenders won’t be any less likely to approve your mortgage application—you simply need to be better organized.

Watch this video on how to get approved for self-employed mortgage:

Do self-employed buyers pay higher mortgage rates?

No, not necessarily. In fact, there are certain scenarios where self-employed homebuyers will pay lower mortgage rates than employed homebuyers.

Take, for example, interest rates. These might be the same or sometimes lower than the interest rates of an employed borrower. Other factors that impact mortgage rates include:

• credit scores
• down payment
• length of the mortgage

How to prepare for self-employed mortgage applications

Here are a few ways on how to prepare yourself for a mortgage application if you are self-employed:

Optimize your credit score

A strong credit score history is integral to most financial transactions, especially a self-employed mortgage. It gives lenders a good insight into how well or how poorly you have dealt with debt in the past and if you have a history of making payments.

Ensure you have a healthy debt-to-income ratio

Your debt-to-income (DTI) ratio is the portion of your income that you put toward your debt payments every month. Mortgage lenders usually look at your DTI to determine if you will have enough income remaining to make added mortgage payments.

Before you apply for a mortgage, pay off credit card or car loan debts if you can. Also do this if you are concerned that your DTI is too high.

Prove that you have a steady income

You will qualify for a home loan if you can generate steady income, whether employed or self-employed. As a self-employed borrower, proving that you have a reliable source of funds might be the most critical preparation.

Bank statements and tax returns are some common ways to prove your stable monetary streams. It is necessary to make sure that you can prove your income with solid paperwork.

Make your income history readily available

Most mortgage companies would want to see your income history for at least the past year. For that information, lenders will most likely review your tax return.

Change your approach to ensure you have a tax return that shows a strong net income, especially if you are in the habit of using a lot of write-offs.

Bank statements are another way to prove your monetary source. Lenders usually ask for up to 24 months' worth of bank statements to calculate your average monthly income. This is based on deposits made into your bank account.

Make a large down payment

Lenders generally view you as less of a risk if you make a large down payment since by doing so, you will have less debt to repay. Your monthly mortgage payments will be lower, and you will have less money borrowed if you default. Having a down payment of over 20% might also save you from having to pay personal mortgage insurance.

Not only can a large down payment make it easier for you to qualify for a home loan, but it can also give you access to better terms like lower interest rates.

Prepare all your financial documents

The mortgage professional you are working with will let you know which financial documents you need to provide. While it can vary, bank statements and tax returns are most requested. Check if you have those in handy. If not, get them as soon as possible.

Since self-employed homebuyers tend to have more complex sources of income, they need to dig deeper. Connecting your accountant with your lender is one way of doing it or providing more proof of income.

Try to save 

This is not a requirement but saving big can help you when you apply for a mortgage. If nothing else, it can provide you with more options like reducing the amount of debt you take on by making a large down payment.

How do I show self-employed income for a mortgage?

To show self-employed income for a mortgage, you need to provide a history of uninterrupted self-employment income for at least two years. Most mortgage banks or companies will look for the following:

Employment verification

Employment verification will help you prove that you are self-employed. One way to get employment verification is to show letters or emails from these sources:

• current clients
• licensed certified personal accountant
• professional organizations that can verify your membership
• Doing Business As (DBA)
• insurance for your business
• any business or state license that you hold

Income documentation

You will be one step closer to getting approved for a mortgage if you have income documentation. Most lenders ask for these documents:

• personal tax returns
• profit and loss statements
• bank statements

Is it better to be employed or self-employed for a mortgage?

From a mortgage lender’s perspective, it is easier to determine your financial standing if you are employed rather than self-employed. Here is a quick breakdown of employed borrowers and self-employed borrowers:

Employed mortgage

An employed borrower typically has a contracted salary with their employer and is easily able to produce employment verification and income documentation. Lenders use this information to determine how much income the borrower must make to repay their mortgage.

Employed borrowers' taxes are also more neatly organized. At the end of every month, tax is deducted from their salary and the rest comprises their net income. In other words, these automatic calculations make it simple for lenders to determine if you qualify for a home loan and for how much.

Self-employed mortgage

For self-employed borrowers, determining profit can be more complicated—both for the borrower and the lender. This does not mean that they are less likely to be approved for a home loan. They just need to do more work throughout the process.

These financial elements can make it hard to prove to a mortgage company that the money earned by self-employed borrowers is enough to repay the loan:

• expenses
• taxes
• dividends
• invoices
• bills

If you want to purchase property soon, you must start organizing your income and finances. This also means anticipating questions your potential lender will ask you about your income.

Self-employed for under two years

You can still secure a mortgage if you are self-employed for less than two years. To do this, your business needs to be active for at least 12 consecutive months. In this case, lenders usually do an in-depth review of your training and education to determine if your business will likely continue a track record of stability.

Eligibility criteria for self-employed mortgages

Mortgage companies will determine your eligibility based on a reliable source of cashflow. You will be eligible for mortgage financing as a self-employed borrower if you are doing one of any:

• earning income as a freelancer
• running your own business
• taking contractual projects
• doing seasonal work
• performing gigs and other side jobs

Either one of these can be considered as additional streams of income in addition to a primary source of funds. They can also be taken on their own merit.

On occasion, lenders will also count unemployment income for seasonal or contract workers with a documented history of getting off-season unemployment. Regardless, loan officers must determine any source of income as ongoing (i.e., that it will likely continue for three years’ minimum after closing). If your income is viewed as declining, it will make your chances with a mortgage lender worse.

To determine your business’ stability and the chances that its generated income will continue at the same level, loan officers might also conduct a review for self-employed borrowers. One issue that can threaten your chance of approval is if you are in a declining industry.

To illustrate, here are some scenarios when a self-employed borrower’s income is on a decline:

• a home builder during a housing downturn
• a restaurant owner during a pandemic
• a stock trader during a market crash

How to organize your finances for a self-employed mortgage

If you are self-employed and need to organize your finances for a mortgage loan application, these strategies may be helpful:

Hire an accountant

You may be required by some lenders to hire a qualified accountant to prepare your financial information. This is common if your accounts are complicated.

Understand your finances

Understanding your finances is critical. If you own a business and fail to demonstrate a thorough review of its financial history, most lenders will be reluctant to approve your mortgage loan.

Use accounting software

Accounting software can help you keep all your financial information in one place. This can make you organized and provide insight for lenders into how your business is performing. Using accounting software also provides evidence to lenders that you can make the mortgage repayments.

Key to securing your self-employed mortgage

While being a self-employed borrower may be a little more complicated for both you and the lender, if you are well organized, it likely will not make a difference to your being approved or the type of mortgage loan you will receive.

All mortgage lenders need to know is that you will repay the loan. To prove that you can do that, ensure your financial documents are in order. Remember, the key to securing your self-employed mortgage is to be organized. If you do that, you will realize your dream of home ownership, just like anybody else.

Self-employed borrowers would need to hire an experienced mortgage broker to connect them with the right lender. Want to work with the best mortgage professionals in the US? Find them here on our Best in Mortgage page.

Do you think that home mortgages for self-employed borrowers get less approvals than the traditional ones? Why or why not? Share your thoughts in the comments section below.