Options For Self-Employed Home Loans 

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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If you’re self-employed and planning to buy a home soon, you may be wondering what the process entails. The good news is it’s not much different from what you’d experience as a borrower with traditional employment. However, once you apply, you may need to provide additional documentation demonstrating to the lender that your income is consistent and will continue for the foreseeable future. 

Traditional and NQ Mortgage Loans

 
Are you looking to finance a home too expensive for a conventional loan? An Angel Oak Jumbo Loan can provide financing for up to $3.5 million.

Who is Considered a Self-Employed Individual by a Mortgage Lender?

The following individuals are considered self-employed in the eyes of lenders

  • Freelancers
  • Gig workers
  • Business owners 
  • Contract workers
  • Seasonal employees 

Is It Harder to Get a Home Loan if You Are Self-Employed?

It can be more challenging to get a home loan if you’re self-employed and aren’t prepared for what to expect when you apply. 

What Lenders Typically Look for in Self-Employed Individuals

Lenders want to be assured that you can afford the monthly mortgage payments. So, they prefer self-employed applicants that have been in business for at least two years with earnings trending upward each year. If it’s only been a year since you’ve been self-employed, you could still qualify for a home loan. However, you must be able to show to the lender that the business has been active for the last 12 consecutive months. 

It’s equally important that your company’s financial health is in good standing and has a high likelihood of continuing to operate profitably in the future. But if the risk of default is deemed significant, you could be charged a steep interest rate or denied a home loan. 

Are There Home Loans Specifically for Self-Employed? 

You can apply for a conventional or government-backed mortgage with many traditional banks, credit unions and online lenders. However, there’s also an innovative mortgage product from Angel Oak Home Loans, a full-service mortgage lender that’s worth considering. 

It’s referred to as the Bank Statement Home Loan and caters to self-employed borrowers. Instead of using tax returns to qualify for a mortgage, you can qualify for a mortgage using your personal or business bank statements

Loan amounts between $150,000 and $3 million are available, and the proceeds can be used to purchase a primary home, a second home or an investment property. A minimum of two years of self-employment is required. Plus, you’ll need to provide 12 or 24 months of personal or business bank statements. 

If a Bank Statement Home Loan doesn’t quite work for you, other mortgage offerings could be a better fit. Explore loan options today by submitting the online form, and a member of the team will respond to your inquiry promptly.

Traditional and NQ Mortgage Loans

 
Are you looking to finance a home too expensive for a conventional loan? An Angel Oak Jumbo Loan can provide financing for up to $3.5 million.

Tips to Get Your Home Loan Approved When You’re Self Employed

Build Your Credit

Your credit score plays a big role in whether or not you’ll be approved for a home loan. The minimum credit score varies by the loan program you select. You’ll generally need a 620 or higher for a conventional loan or 580 for an FHA loan (or 500 with a higher down payment). 

Still, some lenders have overlays or even more stringent guidelines. So, it’s vital that you check your credit report to ensure it’s free of errors that could be dragging your credit score down and file disputes promptly if needed. Also, note any areas that could use improvement and consider boosting your credit health before applying for a home loan. 

Reduce Your Debt-to-Income Ratio

Most mortgage programs cap the maximum allowable debt-to-income (DTI) ratio at 50 percent. This figure is computed by dividing your minimum monthly debt payments by your gross monthly income (before taxes) if you’re compensated for your services as a W-2 employee. Otherwise, the lender will use your monthly net income (after deductions) when calculating your DTI, which could make it harder to qualify for a mortgage depending on your write-offs. 

The lower your DTI, the better in the eyes of mortgage lenders. However, if it exceeds 50 percent, you’re better off taking some time to pay down debts to have the best chance at qualifying for a mortgage with competitive terms. 

Offer Sufficient Down Payment

The minimum down payment required for conventional loans is 3 percent. But if you opt for an FHA loan, the minimum down payment requirement increases to 3.5 percent. If your credit score is between 500 and 579, you’ll need a down payment of 10 percent. Consider making a higher down payment, if possible, to lower the amount you’ll need to borrow and potentially qualify for better loan terms. 

Ensure to Separate Business and Personal Expenses

It’s never a good idea to commingle business and personal expenses. Doing so often leads to complications when updating your company’s book and at tax time. Furthermore, this practice is heavily frowned upon by mortgage lenders.

Research and Do Your Due Diligence

Not all self-employed home loans are the same. In fact, some are far better than others. So, you must research an assortment of options that may be available to you and retrieve rate quotes from a few lenders. Also, be sure to compare loan terms and fees to ensure you’re getting the best deal on a home loan. 

Provide Other Forms of Documentation

It’s not uncommon for lenders to request proof of self-employment for at least the past two years. Before you apply for a loan, gather the following information: 

  • Your business license from your state of residence (if applicable)
  • Your current client roster
  • Personal tax returns (including all forms) from the past two years
  • Profit and loss statements from the past two years 
  • Personal and business bank statements from the past three months 

You can also ask the lender to provide you with a list of documents they will need to process your home loan application. Doing so before you apply will help prevent any potential delays when your application goes to the underwriting department for review and before a decision can be made.

Angel Oak

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