Mortgage options for self-employed borrowers

Why is self-employed different?

Self-employed people often struggle to qualify for a home loan because their income is challenging to verify. Traditionally, lenders will ask to see a borrower’s W2s and tax returns. Since business owners do not get W2s and often use tax write-offs for business expenses, their personal tax returns usually do not reflect their ability to repay a mortgage obligation. However, there are multiple loan program options for this type of borrower.

Self-employed borrowers have the same access to traditional loan programs as any other borrower. Each borrower is evaluated individually to determine their eligibility for a home loan. Factors such as credit scores, income/profits, and other financial considerations are taken into account. In some cases, due to the complexity of a business owner’s financial situation, alternative documentation may be required to calculate their income. In such instances, a bank statement loan could be the most suitable option.

Self-employed mortgage checklist

Regardless of which loan you apply for certain documents will be requested. Applying for a home loan is notoriously documentation-intensive, so don’t be surprised if you are asked for additional documents not listed below.

• Bank Statements
• Tax Returns
• List of current debts and monthly payments
• Declaration of assets
• Additional sources of income
• Proof of current housing payment
• Verification of your business or employment

Can you qualify for a home loan when you are self-employed?

As mentioned, those who work for themselves often do not receive W2 forms, and frequently, the income they show on tax returns is not high enough to qualify due to business and other expenses. Additionally, some individuals who work on commission or earn a significant portion of their income via tips or bonuses may not receive consistent pay stubs. These individuals can qualify for a bank statement loan if they meet the requirements. Borrowers in this category include business owners, freelancers, and contractors. Some examples of specific professions that may benefit from a Bank Statement Loan include Journalists, Handyman, Doctors, Realtors, Small Business owners, Hairdressers, Uber drivers, etc.

What types of loans are available for self-employed borrowers?

Self-employed borrowers can apply for multiple mortgage options. Like any borrower, their loan approval will depend on the loan program they choose, their credit, and the amount they have for their down payment. Get pre-approved so you know where you stand.

Conventional mortgage

A conventional mortgage is a home loan that is not guaranteed by the government. It typically costs less than FHA loans but can be more difficult to qualify for. Conventional loans are conforming loans with maximum loan amounts set by the government. Fannie Mae and Freddie Mac provide the backing for conforming loans.

FHA loan

FHA mortgages are insured and guaranteed by the Federal Housing Administration (FHA). Since they are backed by the FHA, lenders can offer these mortgages to borrowers who might not have the best credit or large down payments. The FHA will step in if the borrower defaults on the loan.

VA Loan

VA loans are a type of mortgage available to people who are currently serving in the armed forces or who have in the past. The length of time you need to have served with the armed forces depends on when you were on active duty, usually anywhere from 90 days to 24 months. If you were married to someone who died while on active duty, you can also qualify for a VA loan.

Jumbo Loan

Jumbo loans are non-conforming loans that exceed loan limit guidelines set forth by Fannie Mae, Freddie Mac, and their regulator, The FHFA. This limit varies depending on the cost of living in each area. Jumbo loans are generally used for higher-priced homes and are non-conforming because they do not satisfy the terms and conditions.

Non-QM loans

Non-QM loans are non-conforming loans and use alternative income verification methods. Bank statements, 1099s, and other forms of income are acceptable in place of traditional paystubs with these loans.

What is a bank statement loan?

Our bank statement loan program is designed to help self-employed borrowers, small business owners, and entrepreneurs qualify for a mortgage or refinance if other loan programs do not fit. A bank statement loan is a type of mortgage that allows borrowers to use their bank statements to prove their income. This loan type is designed for business owners and 1099 wage earners who can’t qualify using their tax returns because their income is not high enough. Instead, they provide their bank statements from the past 12 or 24 months as proof of income. The bank statement program offers a loan solution to help underserved, credit-worthy, self-employed borrowers who may not qualify for a home loan.

It’s important to understand that bank statement loans may come with slightly higher interest rates than traditional loans. Additionally, they may have stricter requirements for down payments and credit scores. However, it’s crucial to remember that bank statement loans are not about getting the ‘best rate’. They are solution-based loans designed to help self-employed borrowers who may not qualify for a home loan through traditional means.

Conclusion

The population of self-employed people will continue to grow, which could mean that the number of self-employed borrowers will also increase. According to the Bureau of Labor Statistics, about 17 million Americans were self-employed in the U.S. as of 2021. This number is projected to grow substantially over the next few years. Gig economy statistics indicate that the independent work trend is expected to continue to increase in popularity, too— in 2024, the number of active freelance workers in the US is estimated to skyrocket to a whopping 76.4 million, according to a study by DoorDash. The trend will make flexible lending programs and guidelines necessary for these workers to buy homes.

If you have questions about a bank statement loan or any of our competitive loan products, contact our knowledgeable loan team to learn more.

Self-employed Borrowers FAQs

Q: What income do lenders consider when determining whether I am eligible for a mortgage as a non-W2 worker?
A: Lenders look at your net business income, meaning the amount you bring in after subtracting all business expenses.

Q: Do I need a co-signer to get a mortgage if I am self-employed?
A: No, if you have good credit and a verifiable source of income, you should be able to get a mortgage on your own.

Q: Are interest rates higher for self-employed borrowers?
A: The interest rate a self-employed person pays on their mortgage can be the same or even lower than that of a traditionally employed person. The factors that influence interest rates include your credit score, how much you put down, and the length of the mortgage.

Sources:
ConsumerFinance.gov