How to Get a Mortgage if you are Self-Employed: 7 Simple Steps

Trying to get a mortgage while self-employed seems like a complicated process because banks tend to favor W-2 employees over self-employed entrepreneurs. While you do need to take extra steps to comfort lenders, you’re just as likely to get approved for a loan as your full-time counterparts. Here’s what to know if you’re looking for a home loan as a self-employed borrower.

Fill Out the Appropriate Paperwork

A self-employed business owner requires paperwork beyond that of a 9-5 employee. Lenders will need your entire financial picture of the mortgage applicant, but as a self-employed business owner, you’ll need up-to-date details of at least two years of your whole financial history.

Ensure you have documents related to your federal tax returns and your lists of assets and debts. If you’re a business owner with employees, you will also need a 1099 form and a profit and loss statement. Specific lenders may require additional documents, especially if your business became profitable within the last year.

Look for Self-Employment Specific Mortgage Lenders

It is always important to find a good mortgage rate by comparing providers. Otherwise, you may not get the right deal. However, in your case, it’s possible to find mortgage rates that appeal to business owners who work out of their homes. On the other, less optimistic, hand you may have lenders that will reject you on the basis that you don’t have a “guaranteed income.”

Make Steps to Improve Credit Score

Take the necessary steps to improve your credit score immediately, or you could be turned away, even with a score of 650-700. Banks are always looking for a “sure thing,” and you’re typically seen as a high-risk applicant even with low business debt. To improve your credit score, reduce your debt and pay your bills on time. If you already have a bad credit score due to business debt, you may need to wait a few years to improve your chances.

Fork Over a Large Down Payment

Most lenders will ask for a minimum of a 5% down payment, but if you can go upwards to 20%, you’ll have a higher chance of getting a loan. A larger down payment will make your monthly payments far less, and banks will feel more secure knowing you can pay $500 a month rather than $1000 a month. As debt-to-income ratios are higher in business owners, you can offset your own potential risk by saving more money before finding a mortgage lender.

Have a Strong Employment History

You need a minimum of two years for a bank or lender to trust your business won’t flop in the next coming months. However, if your company has lasted at least 3 years, you’re more likely to see a profit long term according to the banks. You can also use your banking history as proof that your business is booming, which will also mitigate the lender’s risk. 

As an alternative, you can wait for lower interest rates before buying a home (even with poor employment history) because this will also make your interest payments much less. Banks will see your payments as lower risk and will give out loans more readily.

Pay Off Most Credit Accounts

The fewer monthly debt payments you have, the more likely your lenders will trust you can pay them monthly. As a business, you likely have incurred some debt, but putting that amount down to zero will always look favorable to your lenders. You will also receive a better interest rate if you have few debts and multiple assets.

Be Willing to Offer More Documentation

Your lender may ask for more documents to prove that your business is successful. While this sounds like a pain, it’s better to offer up this information when asked than to withhold it entirely. Do your best to place confidence in your lenders and to establish a trusting relationship because that will improve your chances of getting a mortgage and obtaining the best interest rate.