Last updated: November 08, 2023

Mortgage Products

How to get a mortgage when you’re self-employed

Self-employed man with his young daughter celebrating after getting a mortgage approval

Being self-employed can offer great flexibility and independence, but when it comes to financing a home with a mortgage loan, it may sometimes be more challenging than for those employed by traditional organizations. However, don’t worry — obtaining a mortgage as a self-employed individual is entirely possible when you’re equipped with the right information about what you need to prepare.

Definition of Self-Employed

For the purpose of obtaining a loan, a self-employed person is anyone who does not work for another employer. A self-employed person may work as an independent contractor or may own a business alone or with a partner. This business may be a sole proprietorship, partnership or corporation. As long as you own 25% or more of the business, lenders will generally consider you to be self-employed. If you pay yourself a salary and file W-2s, you will still fall into the self-employed category.

As an example, you may have a W-2 job and own a small business on the side. You may not plan to use your self-employment income to qualify for a mortgage, but if you own 25% or more of that business, you must still provide all the business information applicable. Any losses from that business will be subtracted from your W-2 income.

What does the mortgage loan application process look like when you’re self-employed?

The mortgage application process is similar for both a self-employed person and a person who receives a regular source of income from an employer. Both applicants must have:

  • satisfactory credit history,
  • a stable source of income, and
  • a down payment that meets the requirements of the loan product.

The difference for each applicant lies in how the source of income is documented.

For a self-employed person, the tax returns will be used to determine the qualifying loan amount. Generally, the average of two years is used as the basis for determining income. For example, if you earned $50,000 the first year and $100,000 the second year, your loan approval would be based on an average of the two amounts ($75,000 per year).

Preparation is key

Before you dive into the mortgage application process, it’s a good idea to prepare your financial documents. Lenders will check your financial history to assess your creditworthiness and ability to repay the loan. Generally, you should consider having all the following documents ready before you apply:

  • Tax returns: As stated above, most lenders may require at least two years of personal and business tax returns to evaluate the stability of your income. Make sure your tax returns are up to date. Consider working with a certified accountant who specializes in working with self-employed individuals.
  • Financial statements: Prepare profit and loss statements, balance sheets, and bank statements that reflect the finances of your business. Organize these documents to provide a clear overview of your income and expenses. A lender may request a Schedule K-1 if you are in a partnership or owner / shareholder in an S-Corporation.
  • Proof of income: If your income fluctuates, you should anticipate demonstrating steady earnings. This may be done through contracts, client invoices, or customer receipts. If you have a regular client base, showcase long-term contracts to strengthen your application.
  • Credit report: Obtain a copy of your credit report to check for any errors or inaccuracies. If you find any, take steps to get them resolved before applying for a mortgage. A strong credit profile may significantly impact the interest rate that a lender is willing to offer you.

Work with a mortgage specialist for self-employed individuals

Navigating the mortgage landscape may be overwhelming, especially when you’re self-employed. It is recommended that you seek professional help from a mortgage specialist who has experience working with self-employed individuals. These specialists understand the unique challenges faced by self-employed borrowers and can guide you through the process to prepare the necessary documents and meet financial requirements.

Optimize your debt-to-income ratio (DTI)

Lenders assess your ability to make mortgage payments by calculating your debt-to-income ratio (DTI). This ratio compares your monthly debt obligations to your monthly income. Lowering your existing debt or increasing your income may help improve your DTI and increase your chances of mortgage approval.

Save for a larger down payment

While a larger down payment is beneficial for all borrowers, it may be especially advantageous for self-employed individuals. A down payment of at least 20% of the purchase price may help alleviate lender concerns about your income stability and result in more favorable loan terms.

Maintain stable finances

Maintaining consistent financial practices throughout the mortgage application process. Avoid unnecessary large purchases or major financial changes that could raise concern for lenders and impact your mortgage approval.

Consider a co-borrower or joint applicant

If your income is not sufficient to meet the lender’s requirements, you may want to consider applying with a co-borrower. If you are exploring this possibility, take time to understand the implications of entering into a contract with a co-borrower and be clear about responsibility for paying back the mortgage to avoid a negative impact on everyone’s finances.

Shop around for the best mortgage rates

Don’t settle for the first mortgage offer you receive. Shop around and compare rates, terms, and conditions from different lenders to find the best option for your unique needs. Online research may be a valuable tool for finding the most competitive rates and mortgage product offerings for self-employed individuals.

Closing thoughts: How to qualify for a home loan when you’re self-employed

If you are self-employed and looking for a home loan, start planning early. A Certified Public Accountant (CPA) can help ensure that you show the maximum earned income instead of taking extra deductions, which will increase your approved loan amount. Make sure your down payment funds are in your personal account instead of a business account because buyers aren’t typically allowed to use business funds for a home loan. Also, make sure your credit score is in a favorable range.

There is a lot of information out there about self-employed individuals obtaining mortgages, but not all of it is accurate. If you have questions, talk to a trusted lender. It’s possible for someone who is self-employed to get a home loan —  but it’s important to understand the process and unique requirements to avoid unwelcome surprises.

Please note: Discover® Home Loans offers home equity loans and mortgage refinance opportunities, but does not offer purchase mortgages.

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