Securing a mortgage loan as a self-employed homebuyer may require additional documentation to confirm that you consistently earn income. 

  • Self-employed homebuyers may have more complicated income documentation than traditionally employed homebuyers, requiring more flexibility in proof-of-income requirements from lenders. 
  • Profit and loss statements, tax returns, and bank statements may all be used to confirm income for self-employed mortgage applicants.
  • Income is not the only consideration when applying for self-employed home loans; credit scores, down payment amounts, debt obligations, and cash reserves all affect applicants’ ability to qualify for a mortgage. 

When it comes to getting a mortgage, self-employed homebuyers may need to provide more documentation to prove their income than their traditionally employed peers, who receive W-2 tax forms to prove income. This is because self-employed borrowers tend to have more sporadic and/or more complex income.[1] Freelancers, for example, may see substantial differences in income from one month to the next. And business owners may show lower income levels on their tax returns due to the amount of their gross income that is reinvested in maintaining and growing the business. 

Lenders recognize the unique position of self-employed borrowers and tailor the mortgage loan process to cater to this growing demographic. 

This article will explain

  • Which mortgage types are available to self-employed homebuyers,
  • How the mortgage application works for self-employed applicants, and
  • How to increase your chances of qualifying for a self-employed home loan.

Who Qualifies as Self-Employed?

While there are no specific criteria accepted industrywide to determine whether someone qualifies as self-employed, many lenders lean on the definition of self-employed as established by the Internal Revenue Service (IRS) for tax purposes:[2]

  • Those who operate a business as a sole proprietor or an independent contractor. This broad category includes anyone who works for themselves. Common examples include accountants, electricians, graphic designers, personal trainers, and real estate agents.  
  • Those who are part of a partnership that owns and operates a business. This includes anyone who goes into business with a partner. Common examples include architects, doctors, lawyers, and restaurant owners who run the business together.
  • Those who are otherwise in business for themselves. This includes gig workers, freelancers, and those who own a part-time business. Common examples include Airbnb hosts, artists and musicians, food delivery people, rideshare drivers, and social media influencers.

In general, if a substantial share of your income is reported via 1099 tax forms (as opposed to a W-2 from an employer), you may be considered self-employed when applying for a mortgage.   

In some cases, homebuyers earn income from both traditional employment and self-employment (as when an employee earns additional income consistently from an independent side hustle). If you qualify for a mortgage using only the salary/wages from your primary job, you may not need to have your secondary income verified. However, demonstrating higher income may improve your chances of qualifying for a mortgage, so it may be worth having this income verified. When in doubt about your specific situation, contact a mortgage loan officer for personalized guidance. 

Different Types of Mortgages Available

As a self-employed homebuyer, there are multiple mortgage options for you to consider.

Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages (ARMs)

With a fixed-rate mortgage, your mortgage interest rate remains the same throughout the loan term. With an ARM, your rate adjusts at predetermined intervals to reflect changing market conditions (typically after an introductory period during which your rate does not change). 

Fixed-rate mortgages typically offer greater long-term stability due to the unchanging rate.[3] Introductory ARM rates are often lower than fixed-rate options, and may automatically adjust downward if market trends warrant a decreasing rate, but there is a risk that the rate could increase.[3]

Government-Backed Loans vs Conventional Loans

Government-backed mortgages (FHA loans for first-time borrowers and those with lower credit scores, VA loans for military service members, and USDA loans for buyers in more rural areas) are secured by departments of the U.S. government. This government backing reduces risk for lenders and allows them to offer less restrictive qualification criteria and/or favorable terms to eligible buyers of allowed properties.[4] Conventional loans are traditional mortgage loans that are not backed by the government.

Different loan types offer different down payment amounts to qualified borrowers. FHA loans, for example, offer down payments as low as 3.5%. Conventional loans may go as low as 3%, and USDA and VA loans offer 0% down to qualified buyers of properties that meet program requirements. 

Some lenders do not offer conventional loans to self-employed borrowers. 

Non-Qualified Mortgage (Non-QM) and Bank Statement Loans

Non-QMs are home loans that don’t meet the standards for qualified mortgages. Qualified mortgages are those that meet certain standards, such as not having “risky” loan features (like interest-only periods or balloon payments) and having traditionally verifiable income (like pay stubs, W-2s, or tax returns proving that you earn enough to cover your debts and living expenses).[5]

For self-employed applicants who reinvest heavily in their businesses, tax returns might not present an accurate picture of income because so much is deducted, reducing the taxable income figures. Non-QM loans allow for alternative means of demonstrating income.

One such alternative is bank statements. Bank statements may present a more accurate record of income and expenses than tax returns. For this reason, bank statement loans, in which the borrower presents bank statements for income verification, are a commonly used type of non-QM for self-employed homebuyers.[6]

Portfolio Mortgages

Portfolio mortgages are home loans that lenders keep in-house rather than sell on the secondary market.[7]

Retaining ownership of the debt gives lenders more flexibility in the underwriting process, which determines the potential risk of loaning to a particular borrower. 

This distinction is independent of qualified/non-qualified mortgages. You could, for example, have a non-QM mortgage that is also a portfolio mortgage, but this is not always the case.  

The Mortgage Application Process for Self-Employed Homebuyers

The process of getting a mortgage loan is largely the same whether you’re traditionally employed or self-employed. However, self-employed mortgage applicants may have to make a few additional considerations during the process.

Understanding the General Requirements for a Self-Employed Mortgage

Lenders typically consider the following financial indicators when evaluating mortgage applications from self-employed homebuyers:

  • History of income. You may be asked to show that you have been in business for a certain amount of time (such as two years, depending on the lender).
  • Credit score. The numerical representation of how you generally handle debt. Many lenders look for scores of at least 620 (although FHA loans may be extended to those with lower scores).  
  • Down payment. Some borrowers may qualify for down payments as low as 3-5%, but putting 20% or more down has cost-saving benefits. Some VA and USDA loan applicants may qualify for 0% down home loans.   
  • Debt-to-income (DTI) ratio. Your DTI ratio shows how much debt you carry as a percentage of your income. Generally, a lower DTI represents less risk for the lender. 
  • Cash reserves/other assets. Lenders may prefer applicants with cash and other assets that may be tapped to cover the mortgage should income dry up.  

Preparing Your Documentation

In addition to the standard proof of identity all mortgage applicants submit, self-employed applicants may need to provide the following:[8]

  • Federal income tax returns (personal and business) for the past two years
  • Recent bank statements (personal and business)
  • Recent profit-and-loss reports (also known as income statements)
  • A copy of your business license and proof of business insurance (if applicable)
  • Articles of incorporation, LLC, or partnership (if applicable)

Choosing a Lender

It is wise to consult with multiple lenders to compare loan options. If you are buying a home (as opposed to refinancing an existing mortgage), you may choose to apply for mortgage pre-approval to determine how much you are likely to qualify for and at what interest rate. 

Quick Tips for Successfully Financing a Home When Self-Employed

Here are seven ways to improve your chances of qualifying for a self-employed home loan:[1],[8]

  1. Separate business and personal finances, keeping clean records to minimize possible confusion.
  2. Maintain a steady or growing income over time.
  3. Build your cash reserves.
  4. Boost your credit score.
  5. Lower your DTI ratio by reducing debt, increasing income, or both.
  6. Consider a larger down payment.
  7. Compare options from multiple lenders. 

Frequently Asked Questions About Getting a Mortgage When Self-Employed

Are Interest Rates Higher for Self-Employed Mortgages?

Possibly, but not necessarily. Interest rates are based on calculated risks of lending, using a number of factors, not just income.[1]

What Can I Do if I Am Denied for a Self-Employed Home Loan?

If your mortgage application is denied, request an explanation for the denial from the lender. This may guide you forward (for example, by working to improve your credit score before reapplying). You may also apply with other lenders who may have different qualification criteria.[9]

Do Mortgage Lenders Use Gross or Net Income for Self-Employed?

In many cases, lenders consider the full financial picture, using both gross personal income and net business income for self-employed mortgage applicants.[8]

Final Thoughts on Getting a Mortgage When Self-Employed

Lenders are often willing to extend mortgage loans to self-employed homebuyers who have organized financial records, verifiable income, and an acceptable credit score. While you may need to provide additional documentation to show that you earn enough to cover your new mortgage (along with other debts and living expenses), doing so may help you qualify for the loan needed to buy your dream home.

Are you interested in learning more about getting a mortgage as a self-employed borrower? Connect with a PNC Mortgage Loan Officer today to find out more. Your PNC MLO will help you find a product that meets your needs at a competitive rate. Call 1-855-744-2268 to connect with your PNC MLO today.