Getting a Mortgage When Self-Employed Guide

It seems the deck is stacked against you when getting a self employed mortgage.

But mortgage lenders are breaking new ground in offering innovative products to the country’s 15 million self-employed individuals.

From bank statement loans to 1099 mortgages, lenders are rushing in to fill this hole in the market. Plus, conventional and government loans are still an option for many.

Here’s what you might qualify for as a self-employed homebuyer or homeowner.

Mortgage options for self-employed business owners

Here’s a taste of the newer products designed for home buyers and refinancing homeowners who are self-employed or own a business.

Bank statement loans

These loans use bank statements to verify income instead of tax returns.

The program can be a big advantage to those who write off a lot of expenses on their tax returns. Traditional lenders must qualify you with income after expenses. This limits your buying power. Bank statement lenders, though, just look at deposits.

Bank statement loans let you qualify with 12 or 24 months of bank deposits, but some programs let you use just 1 month or 3 months. The lender applies an “expense ratio,” which is usually a 50% reduction in deposits. This is to account for expenses. For example, if you had $200,000 in deposits over the last 12 months, your qualifying income would be $100,000.

These loans can be perfect for high-net-worth individuals since loan amounts can be as high as $4 million or more. Another advantage: you need as little as 10% down and there’s no PMI.

No-Doc Mortgage

No-Doc mortgages outdo bank statement loans in that no income documentation at all is required.

How do lenders do this? Instead of income, they look at the applicant’s net worth, credit score, and property. If all of these elements are strong, the loan could be approved.

Typically, 20-30% down is required. With a large down payment, credit score can be as low as 640.

This program is reserved for self-employed individuals only. They can use it to purchase or refinance a primary home or vacation property. The loan amount can be up to $3 million.

1099 Mortgage

The gig economy has exploded in the past 10 years, which is fantastic for those who want to control their own careers.

However, many people discover they can’t qualify for a home loan because they write off expenses, just like any good business owner.

Fortunately, more lenders today allow you to use the last 1-2 years of 1099s instead of tax returns to qualify. That way, applicants can use their real representative incomes, not the too-conservative number at the bottom of their tax returns.

1 Year Self-Employed program

For the newly self-employed, getting a mortgage can be a big challenge.

Most lenders — even those that accept bank statements to qualify — want to see 2 years of self-employment.

However, a few lenders now offer a 1-Year Self-Employed mortgage. You need to provide 12 months of bank statements showing adequate income and you could be approved.

Typically, you need a 20% down payment and a credit score in the mid-600s.

Bank statement 2nd mortgage

The average homeowner is sitting on $185,000 in home equity, says Investopedia. But self-employed homeowners find it difficult to tap into that equity. Most 2nd mortgage and HELOC lenders want to see two years of tax returns to qualify.

But now there’s a 2nd mortgage that uses bank deposits to qualify. Self-employed applicants can use it to:

• Complete home improvements
• Invest in additional properties
• Consolidate debt
• A legal or divorce settlement
• And more

The program is available for primary residences, vacation homes, and investment properties.

• Self-employed mortgage programs
• Refi, Cash-Out Refi, and Purchase
• Primary, Second, Investment Homes
• No tax returns

Get Qualified

Conventional and government mortgages

We’ve talked a lot about alternative programs, but what about traditional lending? Going with a conventional or government loan can get you better rates and terms in some cases.

Here’s what you’ll need to provide for a conventional loan from Fannie Mae or Freddie Mac, or a government-sponsored program like FHA, VA, and USDA.

2 years of self-employment

This is required since it really takes at least that long to prove the viability of the business, as well as to document a track record of consistent earnings.

For FHA and VA loans, it’s possible to qualify with less than 2 years of self-employment if you were in a very similar job prior to starting your own business.

Keep in mind that the 2-year requirement is a bit misleading. You need 2 years of filed tax returns showing enough income after write-offs to qualify. So you likely need to wait until April or May of the 3rd year of self-employment before you have adequate documentation.

Adequate income after write-offs

When you have a W2 job, the lender uses gross income to qualify. Not so when you’re self-employed.

If you made $100,000 last tax year, but wrote off $40,000 in expenses, the lender can only use $60,000.

Mortgage lenders will allow you to add back non-cash expenses, like depreciation and amortization, to your income. But any other expenses deducted against your gross income on your tax return(s) will stick.

Related: How Mortgage Lenders Calculate Self-employment Income

Non-declining income

For conventional and government loans, the lender will compare the most recent year’s income to the previous year. It wants to see steady or climbing income.

If you have declining income — say dropping from $80,000 in adjusted income two years ago down to $50,000 last year, the underwriter will request a letter of explanation. You wil have to convince the underwriter that the lower year is an anomaly. You will be asked to show a current-year profit and loss statement to prove you’re on track for a better year.

Down payment coming from personal expenses

For many small business people, particularly sole proprietors, there’s no real separation between their personal and business finances. They assume that if they need money for a down payment on a house, that they can simply take it out of their business.

The underwriter may disagree. The underwriter must be concerned that the withdrawal of a substantial amount of money from the business, or a business account, can weaken the business to such a degree that the operation may be impaired.

In these situations, the underwriter will likely ask for a letter from your CPA, confirming that the withdrawal of funds from the business will not affect the business in a negative way.

Business documentation

Some of the additional documents that the lender will request can include (and you should be prepared to provide):

• Your most recent two year’s personal income tax returns, signed and including all schedules
• Your most recent two year’s business income tax returns, signed and including all schedules
• A copy of your most recently filed business license (state, county, or municipal)
• A letter from your CPA verifying the start date of your business (if less than two years)

You should also be prepared to provide any additional documentation that will be necessary to address questions or concerns regarding any of the above documentation.

Prepare early when getting a self-employed mortgage

Start gathering documents early, epecially when you get a conventional or government loan.

Luckily, there are alternatives in today’s market to help you avoid the paperwork burden of getting the traditional self-employed mortgage.