Getting a mortgage if you're self-employed

If you’re self-employed or own a business, you may ask what your mortgage loan options are. It’s not uncommon to think: Is it possible to get a mortgage if I’m self-employed?

The short answer is yes, you can, but the process will look different. If you run your own business, you’ll need to provide documentation that shows verification of your employment. Lenders will be analyzing your financial situation to see how likely you are to pay back your loans in a timely manner — so, by extension, they are also looking at the financial situation of your business.

We’re here to help you put your best foot forward while preparing your mortgage application and offer some guidance on how to navigate the home loan process if you’re self-employed.

Typically, lenders consider an applicant self-employed if they meet any of the following:

• They own at least 25% of a business.
• The ownership of a business is their major source of income.
• They complete a 1099 tax form during tax filing instead of a W-2.
• They’re an entrepreneur or sole proprietor whose income is filed under Schedule C of their tax returns.
• They’re an independent contractor or service provider.

If you fit into these categories, you’ll also need to show lenders verified employment records or proof of self-employment during the past two years. If you’re a business owner, lenders are ideally looking for your business to have been active for at least 12 consecutive months. Lenders review the overall health of the business looking at both the net income and expenses for the self-employed borrower.

When lenders review your application, they analyze items like how stable your income is, if your business has strong finances, and what the future may look like for you and your business. Any of the following forms of documentation can help lenders show proof of your employee verification:

• Business licenses and/or DBA certificates
• Proof of correspondence with CPAs and/or clients
• Proof of business insurance
• Profit/loss statements or balance sheets reflecting your business’ performance

Note that lenders may have specific requirements for applications. Check with your lender for what will be required for your self-employment situation.

Personal tax returns under IRS Form 1040 include various schedules. Commonly used schedules to report income are as follows:

• Schedule B (Form 1040) – Interest and Ordinary Dividends
• Schedule C (Form 1040) – Profit or Loss from Business (Sole proprietorship)
• Schedule D (Form 1040) – Capital Gains and Losses
• Schedule E (Form 1040) – Supplemental Income and Loss
• Schedule F (Form 1040) – Profit or Loss from Farming

For business tax returns, a business may choose to report taxable income either on a calendar year or fiscal year basis. Commonly used forms for business tax returns include:

• IRS Form 1065 – U.S. Return of Partnership Income
• IRS Form 1120S – U.S. Income Tax Return for an S Corporation
• IRS Form 1120 – U.S. Corporation Income Tax Return

Generally speaking, these factors may help show lenders the strength of your borrowing ability:

• Having a favorable debt-to-income ratio (DTI) and credit score – Having a positive credit history may show lenders your ability to repay debts and utilize credit in a responsible manner.
• Staying organized – Be sure to keep expenses separate if you have multiple income sources, and keep separate business and personal accounts so that lenders can more easily tell which assets are which.
• Having additional support, especially for closing – Certain factors may lower your risk for lenders, like utilizing a co-signer or borrower, or paying a higher-percentage down payment than what’s required.

If you are self-employed, there are methods available to help make your goal of homeownership a reality. As a self-employed borrower, you could be eligible for VA or FHA loan programs. We also have programs to help with your down payment and closing costs if you qualify.

Talk to a home mortgage consultant today for more information and to hear more about what the mortgage process may look like for you. To learn more, check out this article on preparing to buy a home and get a personalized rate quote.