How to get a mortgage when you’re self-employed
It’s a common misperception that self-employed people can’t get a mortgage. The truth is that they can qualify for the same loan products as traditionally employed applicants. The only difference lies in the process and criteria of qualification, since they can’t produce all the same documents as can employees.
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 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.
If you meet any of these criteria, it will help you to understand what is required to obtain approval for a home loan.
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 (if purchasing a home) that meets the requirements of the loan product they're applying for.
The difference for each applicant lies in how the source of income is documented.
Generally, both applicants must supply the past two years of tax returns. However, for the traditionally employed person, the tax return is used to verify a recent history of consistent employment with no significant changes. The determining factor for the loan approval amount is the applicant’s paycheck stubs.
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 the person earned $50,000 the first year and $100,000 the second year, loan approval would be based on an average of the two amounts ($75,000 per year annual income).
Another difference in the application process is that self-employed buyers must provide sufficient documentation of their business. A lender may request a Schedule K-1 if you are in a partnership or owner / shareholder in an S-Corporation.