If you’re one of the 57 million people who freelance or are self-employed, you might run into challenges when applying for a mortgage. That’s because, without a W-2, it’s harder to prove you have a steady income.
Although self-employed mortgage applicants must take extra steps during the mortgage process, it’s still possible to secure financing for your next home.
1. Know what lenders want from self-employed applicants
Lenders ultimately want to make sure self-employed mortgage borrowers have stable income that they can rely on for the foreseeable future.
When applying for a home loan, borrowers will generally need to show at least two years’ worth of uninterrupted self-employment income. That helps lenders see that the borrower is in overall good financial health.
2. Improve your credit score
Credit scores play a big role in whether an applicant qualifies for a mortgage and the interest rate they get. Lenders might not have a target credit score specifically for self-employed people, but they’re generally looking for a score of at least 620.
Because lenders are tightening standards, you might need a higher credit score these days. The average FICO credit score among mortgage borrowers in September 2020 was 767, according to Ellie Mae.
Tip:
Before applying for a self-employed mortgage loan, check your credit report for errors and evidence of fraud. If you notice inaccuracies, you can dispute them with the credit bureaus. Also check your credit scores to see if they need work.
Here are some ways you can improve your credit:
- Pay down your debt balances
- Keep your credit card balance under 30% of its credit limit
- Don’t apply for new credit before applying for a mortgage
- Make all your bill payments on time
Learn More: Credit Score Needed to Get a Home Loan
3. Lower your debt-to-income ratio
Your debt-to-income ratio measures how much of your monthly income goes toward debt payments. This number helps lenders determine if you can comfortably afford a mortgage payment.
There are two types of DTI ratios:
- Front-end DTI: This shows how much of your income goes toward a housing payment
- Back-end DTI: This shows how much you spend on all debts, including housing. Lenders generally look for a back-end DTI ratio of 43% or less.
Let’s say you earn $5,000 a month before taxes. You pay $300 a month toward student loans and $350 for an auto loan, and your estimated future monthly mortgage payment is $1,200. Here’s how you calculate both ratios:
Front end:
$1,200 / $5,000 = 0.24 x 100 = 24%
Back end:
($300 + $350 + $1,200) / $5,000 = 0.37 x 100 = 37%
Tip: Lenders don’t have DTI requirements specifically for self-employed mortgage borrowers, but a lower ratio may improve your chances of approval.
If you need to improve your DTI ratio to qualify for a mortgage, work on paying down your debts and increasing your income.
4. Try to save up for a higher down payment
While you can put down as little as 3% with some types of mortgages, a higher down payment offers several benefits:
- It helps you appear less risky to lenders because you’re putting more equity into the home
- You can avoid private mortgage insurance if you put down at least 20% on a conventional mortgage
- The lender may lower the interest rate for borrowers with a higher down payment
If you’re having trouble coming up with a down payment, check out down payment assistance programs. These are geared toward first-time homebuyers, but repeat homeowners might also qualify.
5. Gather all your documentation
Lenders will require extensive documentation from self-employed mortgage loan borrowers to verify their income and make sure the borrower can make their mortgage payments.
Before heading to a lender, do a little prep work by gathering these documents:
- Two years worth of business tax returns and personal tax returns
- Copies of current state or business licenses
- IRS Form 4506-T, which allows lenders to access your tax records
- A profit-and-loss statement, including debts and expenses
- A balance sheet
- Asset account statements, such as retirement or investment accounts
- Any additional income, such as Social Security or disability
The lender will look for taxable income and may subtract anything that doesn’t seem stable and consistent.
If you’ve been in business for less than 24 months, the lender may expect to see more documentation related to your business, including:
- A letter from a CPA attesting that you’ve been in business for at least one year
- Evidence of membership in any professional organizations
- Communications and contracts from current clients
The lender might also request a W-2 from your previous employer. With a strong work history in the same field — proven with the W-2 form — you might be able to get a home loan with as little as 12 months of self-employed work.
6. Consider a low-doc or no-doc mortgage
A “low-documentation loan” or “no-documentation loan” allows self-employed borrowers to apply for a mortgage without extensive financial documentation. Instead of tax returns, lenders may review your assets, ask you to state your income or base the loan entirely on the collateral.
There are four types of low- and no-doc mortgages:
- SISA (stated income, stated assets): With this type of loan, you tell the lender how much you earn without providing tax returns or W-2s. This can be useful if you have significant income and assets that can’t be documented through a W-2, 1099, or pay stubs. But you might need to provide 12 to 24 months’ worth of bank statements so the lender can calculate your monthly cash flow.
- SIVA (stated income, verified assets): You tell the lender how much you earn, but they can verify your assets through documents such as personal bank account statements.
- NIVA (no income verification, verified assets): You can verify your assets but can’t document your income — so the lender doesn’t take your earnings into account. For example, a retiree who draws income from their retirement accounts has verifiable assets.
- NINA (no income verification, no asset verification): You can’t provide documents for income or assets, so the lender approves your loan based on the collateral and other non-income factors. For example, someone with money in a foreign bank may not be able to provide documentation that’s acceptable to U.S. lenders.
It might be difficult to find a lender that offers such mortgages, and they may come with higher credit score requirements than traditional mortgages. Additionally, the interest rate might be up to 3 percentage points higher than a loan with a standard rate.
7. Consider applying with a co-borrower
A self-employed borrower who applies for a mortgage with a co-borrower — a spouse, for example — might be able to sidestep some of these documentation requirements.
Your co-borrower should have a W-2 that shows they earn enough to comfortably cover the mortgage payments along with other household expenses. Having little to no debt and a good amount of cash reserves will also boost your chances of approval.
Tip:
Talk with your lender about this approach. They can include you on the loan — so you’ll both be responsible for payments and own the home together — but the lender may ignore your income in the underwriting process.
Check mortgage rates:
8. Shop around for the best rates
When it comes to finding the best interest rate on home loans, shopping around can help you save hundreds or even thousands of dollars.
Frequently asked questions
How many years of income do you need for a self-employed mortgage?
Most lenders require at least two years of consistent, verifiable income when applying for a mortgage as a self-employed borrower. This helps show that your income is stable and sufficient to cover mortgage payments. In some cases, lenders may accept one year of income if your self-employment history and financial situation are very strong, but this is less common.
What is proof of income for a self-employed mortgage?
To prove income for a self-employed mortgage, you’ll typically need to provide:
- Tax returns (usually two years' worth).
- Profit and loss statements.
- Bank statements to show cash flow.
- 1099 forms if you receive contract income.
Lenders may also ask for additional documentation such as business licenses or a CPA letter confirming your income and business status.
Is it hard to get a mortgage with a 1099?
Getting a mortgage with 1099 income can be more challenging than for salaried employees, but it's not impossible. Lenders generally require detailed documentation, including two years of 1099 forms, tax returns, and other proof of consistent income. Lenders may scrutinize your debt-to-income ratio more closely to ensure you can manage mortgage payments with the fluctuations typical of 1099 income.
How do I get an FHA loan if I am self-employed?
To get an FHA loan as a self-employed individual, you need to:
- Provide two years of tax returns showing stable income.
- Submit profit and loss statements and bank statements to verify cash flow.
- Ensure your credit score meets the FHA minimum (typically 580 for a 3.5% down payment, though some lenders may require a higher score).
- Your debt-to-income ratio must also fall within acceptable limits (typically 43% or lower).
Does Fannie Mae require 2 years of tax returns for self-employed?
Yes, Fannie Mae typically requires two years of personal and business tax returns for self-employed borrowers. In some cases, if you have been self-employed for more than five years, one year of tax returns may be acceptable, depending on the stability of your income and financial situation.
