Home Loans for Self-Employed: 2024 Guide for Self-Employed Individuals

Securing home loans for self-employed people can be challenging. Many reasons exist, from non-traditional work structures to fluctuating incomes, but it is not impossible.

So, if you’re looking for self-employed mortgage options, this guide is the best place to start.

It is an easy walkthrough of eligibility for home loans for self-employed people, including all the documentation you will need to apply for that loan in 2024.

Let’s go straight into it!

How to Apply for Mortgage as Self-Employed

Here’s a rough step-by-step process for your better understanding. The process is explained in detail further in the article.

• Understand what is considered self-employed.
• Understand the requirements for home loans for self-employed.
• Proof of income.
• Determine how much of that income qualifies for a mortgage.
• Search for a mortgage provider.

Self-Employed Mortgage Eligibility:

Are You Considered Self-Employed?

There are different kinds of self-employed people. It can range from people who own their own business or work independently and not under an organization/company. Let’s see what can be qualified as self-employed:

• Small Businesses: Owners of retail shops, restaurants, etc.
• Freelancers: These are people who are paid on a project-to-project basis. Examples include content writers, graphic designers, consultants, and photographers.
• Independent Contractors are professional workers hired by companies and organizations to perform a specific task but work separately from the other workers. Examples include IT specialists and construction workers.
• Gig Workers take small, flexible jobs, such as delivery riders or Uber drivers.

Self-Employment Mortgage Requirement

If you are a self-employed individual looking to get a home loan, there are a few things you need to keep in mind. Below are the requirements for self-employed mortgages.

Credit score 

Most lenders require a minimum credit score of 620 for most loans. Keep a clean credit record and resolve all problems before applying for a loan.

Stable income and cash flow

Mortgage lenders typically want to see at least two years of consistent self-employment income to ensure you can produce enough cash flow from its operations to meet the mortgage.

Cash Reserves: 

For home loans for self-employed people, lenders require 6 to 12 months of mortgage payments to be held as reserves in the savings account in case of losses.

Debt-to-Income Ratio (DTI):

Your DTI can make or break your application to the lender. Your monthly debt repayments should be lower than 43% compared to your income. A low DTI shows that you can repay debt and makes you a good candidate for a borrower. 

Down Payment:

Lenders require self-employed clients to be able to provide a down payment similar to that of other customers. For example, conventional loans can be as low as 3% when purchasing a home; a 3.5% down payment is typically needed for FHA loans.

Lender Requirements for Self-Employed Borrowers

Lenders have varying standards for home loans for self-employed individuals. Since the income is only sometimes steady and lenders want proof of your ability to repay the loan, they require some documents for proof of your income.

Documentation Required

• Profit and loss statements.
• Business and tax returns (usually two years).
• Bank Statements.
• 1099s.
• Customer invoices and contracts.
• Schedule Cs.
• K-1 statements for partnerships.

Business Inconsistencies

Self-employed income is not steady, so lenders require proof of 2 years of income. Usually, they will add the income of both years and divide it by 24 to produce your average monthly income. 

You must be prepared to explain any significant changes in income over the years, such as business investments, expansions, changes in contracts or clientele, economic factors that affected your industry, etc.

Understanding Different Mortgage Options

It may be challenging to get a home loan if you are self-employed, but you still have the same options as the traditionally employed person. Below are the options you can explore.

FHA Loans

An FHA (Federal Housing Administration) loan is a mortgage insured by the government and aims to help borrowers with poor credit scores or low down payments. Because of this, FHA loans are desirable to self-employed individuals. Below are the pros and cons of FHA loans.

Pros

• Lower credit score requirement.(580 and above)
• More accessible.
• Flexible debt-to-income ratio.
• Low down payment. (up to 3.5%)

Cons

• Loan limits.
• Stricter property standards.
• Upfront and annual mortgage insurance.

Conventional Loans

Unlike FHA loans, conventional loans are not insured by a government agency and are advanced by private lenders. These loans generally come with specific credit and income targets, which makes them suitable for self-employed borrowers with excellent financial status, a reasonable credit score, generally above 620, and an adequate down payment. 

Pros

• More flexible property options.
• Higher loan limits.
• You can avoid private mortgage insurance (PMI) if you make a down payment of 20%.

Cons

• Higher credit score requirement.
• Stricter debt-to-income requirements.
• Higher down payment requirement (at least 5%)

Non-Traditional Loans and Their Flexibility

Non-traditional loans are a category of mortgage that targets people who do not meet the standard lending requirements. This is especially true for those who work for themselves.

Self-employed loans have benefits because they usually have relatively relaxed requirements and different ways of assessing the borrowers. This gives even those with irregular income or unusual financial standing the chance of borrowing. Below are various kinds of non-traditional loans.

Bank Statement Loan

A bank statement loan does not require business tax returns. Instead, it allows a business owner or self-employed person to qualify based on the month’s cash flow without attaching returns. This kind of loan benefits borrowers who usually have high non-taxable expenses, lowering their taxable incomes.

So, for a Bank Statement loan, you’re eligible for a mortgage based on your bank history, typically 12-24 months, as proof of income rather than tax returns.

VA Loans:

The Department of Veterans Affairs covers VA loans intended for military veterans, active military personnel, and some of their widows. These loans come with low fixed interest rates and no monthly PMI payments, and the borrowing requirements for VA home loans are also quite relaxed. 

If your occupation is self-employment, you must show that you have been in current circles for at least two years, have been self-employed for one year, and have had an employment history with a different eligibility period for the last two years.

Portfolio Loans:

Portfolio loans for self-employed individuals are specialized mortgage options offered by private investors. They offer more flexible requirements than traditional loans.

These loans often accept bank statements instead of tax returns, making them accessible for those with inconsistent income. Self-employed borrowers may qualify even with recent bankruptcies or without a Social Security number. 

How to Choose the Right Lender for Your Unique Situation?

When applying for a mortgage, include lenders that understand and work with self-employed earnings, especially non-qualified mortgage (QM) lenders. Non-QMide loans do not meet the conventional lending guidelines, so they are suitable for self-employed people with special financial needs.

FAQs: Most Asked Questions for Home Loans for Self-Employed.

Q: What is the minimum number of years required to be self-employed to qualify for a mortgage?

A: In most cases, an individual must have been self-employed for at least two years before qualifying for a mortgage loan. This time requirement also differs from lender to lender. 

When applying for a self-employed mortgage, it is always good to have two-year tax returns to confirm that one has sufficient funds to cover the monthly repayments necessary to get the loan.

Q: Do mortgage lenders use the gross or net income approach when calculating self-employed home loans? 

A: Most of the time, mortgage lenders use net income to evaluate self-employed individuals for home loans. Net income is obtained after removing business costs, taxation, and other deductions from gross earnings. 

Lenders consider net income to assess the self-employed borrower's actual disposable income and, consequently, their capacity to afford the monthly mortgage cost. They often ask the borrower to submit all tax filings for the last two years to establish an average net income amount.

The Bottom Line

Are you someone who has always dreamed of owning your own house? It doesn’t matter if you are retired or self-employed. Follow the steps in this guide to prepare to meet lender requirements, submit the necessary paperwork, and raise your chances of getting approved. Your first dream house is possible now—start the process today! Income may vary monthly, but that should not prevent you from becoming a homeowner! Contact us and start working towards your dream house today!