Being your own boss comes with a lot of positives: you get to set your schedule, you’re calling the shots, and it usually means you’re doing something you love. When you’re applying for a mortgage, having self-employment income can pose some challenges, though.
You’ll usually be required to provide additional documentation to prove to your lender that your income is steady and reliable to assure you can pay back your loan.
While there are some potential obstacles to overcome as you’re looking to get approved for your loan, you shouldn’t get discouraged. We will share our best practices for getting approved for a mortgage while self-employed to help you breeze through the process with confidence.
What is Considered Self-Employment Income
These are the common types of income most mortgage lenders consider as self-employment:
- Owning a business (sole proprietor, LLC, partnership)
- Freelance work
- Seasonal work
- Contracted employees
- 1099 employees and/or gig work
Of course, these can be considered individually as your primary income source when applying for a loan, which is what we will discuss in this post, or factored in as additional income on top of traditional employment earnings.
WHAT LENDERS LOOK FOR
Like everything in life, it helps to know what is expected of you to be able to put your best foot forward and reach those expectations. For employee, or W2, borrowers, lenders look for a good credit score, a debt-to-income ratio within an acceptable range, and reliable payment history on other accounts. But what are lenders looking for from self-employed borrowers?
As a business owner or 1099 worker, you should be prepared to:
- Prove income stability
- Explain the industry or type of self-employment
- Provide documentation showing the financial strength of the business
- Present a strong case about your business’s sustainability to generate income going forward
IMPROVING YOUR BORROWER PROFILE
Before you apply for a mortgage, you can improve your likelihood for an easier approval process by tackling some of these common issues that self-employed borrowers face.
SHOW THAT YOUR INCOME IS STABLE.
Potentially the highest concern for lenders when working with self-employed applicants is ensuring that their income is stable. Industry viability and potential market changes are the major concerns, so a track record of success can help you overcome this roadblock.
GET YOUR CREDIT SCORE AS HIGH AS POSSIBLE.
While good credit history is essential for all borrowers, it can help overcome other areas that may not be as strong in your borrower profile. And if you have an already well-rounded application, it can help lower your rate.
HAVE A RAINY DAY FUND SAVED UP.
This recommendation isn’t unique to self-employed loan applicants, but it can help provide your lender the necessary assurance that you can continue payments on your loan even in the event of a sudden downturn in your business.
GATHERING THE NECESSARY DOCUMENTATION
Now that you’ve considered the factors that your lender will evaluate for your self-employment income and ensured you’re putting your best foot forward by reviewing and correcting any potential gaps in your credit profile, you’re ready to move on to the next step.
To provide assurance that your income will be a reliable source to pay off your loan, you will likely be asked for certain types of documentation.
You’ll need to provide documentation supporting consistent self-employment income, with most lenders looking for a minimum of two years.
VERIFICATION OF EMPLOYMENT, INCLUDING REGULAR CLIENTS OR A CONSISTENT STREAM OF NEW WORK.
Just like how W2 employees must provide documents supporting their employment, you’ll need to submit documents supporting your self-employment.
The types of documents you can provide will vary depending on your industry and the structure of your business, but these are some common ones you can use:
- Letters from current clients
- Report from your CPA
- Proof of membership in a professional organization
- State or business license
- Proof of business insurance
DOCUMENTATION OF INCOME.
In addition to verifying your consistent self-employment work, you’ll also need to provide proof of the income you’re earning from that work, which is the basis of how you’re showing your lender you can afford to pay back the loan they’re issuing.
For this, your lender will request at least:
- Your personal tax returns
- A profit & loss statement, including a Schedule C, Form 110S, or K-1, depending on your business structure
Equipped with this knowledge of the process of getting a loan with self-employment income, and with your supporting documentation in hand, you’re ready to apply for a mortgage. You’ll be in the best position possible to get your loan approved and continue through the homeownership process.
As you’re looking for a lender to help you get approved for a mortgage with self-employment income, we know you’ll want a team that makes the process clear and provides you with tailored support. Our team is experienced at helping business owners and 1099 employees understand and meet the necessary requirements for loans based on self-employment income. Get a consultation from one of our loan officers today.