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Self-Employed Home Loans: Options To Consider

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Updated October 11, 2023​

6 min. read​

As a self-employed individual, you might be concerned about your ability to secure a home loan or mortgage. Fortunately, there are self-employed home loans that are designed specifically for borrowers like you who are not traditional W-2 employees and own a business or have a significant ownership stake in one. Here’s what to know about these mortgages and how to apply for one to purchase your dream home. 

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What Are Self-Employed Home Loans?

A self-employed home loan, otherwise referred to as a self-employed mortgage, is a type of mortgage that caters to the needs of self-employed individuals who earn income that is not documented through traditional W-2 forms. Unlike traditional mortgages, self-employed home loans require additional documentation and may have different qualification criteria. Self-employed individuals may explore various options such as conventional loans, FHA loans, VA loans or USDA loans to secure a mortgage. 

How Do Self-Employed Home Loans Work

Self-employed home loans work similarly to traditional mortgages. They require additional documentation and have different qualification criteria. Lenders will evaluate the borrower’s credit score, debt-to-income ratio, assets and income to determine eligibility. 

Self-employed borrowers may qualify for a mortgage using net income instead of gross income for their debt-to-income ratio. The ultimate goal of a self-employed home loan is to provide financing to self-employed individuals who have the financial means to make mortgage payments but may not require traditional income documentation. 

Criteria for Self-Employed Home Loans

Below are some general guidelines for self-employed home loans.

Credit Score Requirement

Lenders typically look for a minimum credit score of 620, although higher scores may increase your chances of approval and result in more favorable loan terms. Maintaining good credit by making timely payments and keeping debt levels low is vital.

Income Documentation for the Self-Employed

Proving your income as a self-employed borrower can be somewhat more complex than for salaried employees. Mortgage lenders ask for at least two years of steady self-employment before you can qualify for a home loan. You’ll need to provide tax returns, profit and loss statements and bank statements to verify your monthly income.

Lenders often look at your adjusted gross income (AGI) from your tax returns and divide it by 24 months to calculate your qualifying income. This average is then considered your monthly income for loan qualification purposes.

Down Payment Expectations

A larger down payment can help reduce the risk for lenders when offering a mortgage to self-employed borrowers. While the exact percentage required may vary depending on the loan type and your financial situation, it’s generally best to aim for a down payment of at least 20 percent of the property’s purchase price. This down payment helps increase your chances of approval and potentially eliminates the need for private mortgage insurance (PMI), reducing your monthly costs.

Cash Reserves

Demonstrating that you have sufficient cash reserves is another crucial aspect of obtaining a self-employed mortgage. Lenders may require you to have a certain number of months’ worth of mortgage payments saved in reserves to account for potential fluctuations in your income. The exact amount can differ between lenders and depend on your unique circumstances, such as your credit score, income stability, and debt-to-income ratio.

Self-Employed Home Loans: Options to Consider

Common mortgage products for self-employed individuals include conventional loans, FHA loans, VA loans, USDA loans and non-qualified mortgage (non-QM) loans. 

Conventional Home Loans for Self-Employed

Conventional home loans are typically offered by banks or other private institutions. They usually require good credit scores and a stable income. Most mortgage lenders require at least two years of steady self-employment before you can qualify for a home loan. In addition, you should be prepared to provide extensive financial documentation, such as tax returns, profit and loss statements and bank statements.

FHA Loans

FHA loans are a popular option for self-employed individuals, as they offer more flexible guidelines and requirements. These loans are insured by the Federal Housing Administration, which allows mortgage lenders to offer lower interest rates and more lenient credit score requirements. To qualify for an FHA loan, you’ll still need to provide two years of consistent self-employment history and the necessary financial documentation.

VA Loans

VA loans may be an attractive option if you’re a self-employed veteran or active-duty military personnel. These loans are backed by the Department of Veterans Affairs, offer competitive interest rates and do not require a down payment. Like conventional and FHA loans, you’ll need to provide two years of steady self-employment income documentation and meet any additional VA guidelines.

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USDA Loans

USDA loans are designed for self-employed individuals seeking financing for rural properties. These loans are backed by the United States Department of Agriculture and offer competitive interest rates and flexible terms. To qualify, you’ll need to meet the income requirements and provide two years of consistent self-employment history alongside the usual financial documentation. Keep in mind that there are geographical limitations, as the property must be located in a USDA-approved rural area.

Non-QM Loans

Non-Qualified Mortgages (Non-QM) serve as an alternative for self-employed borrowers who may not fit the conventional loan mold. These loans tend to be more flexible in terms of income verification, credit score requirements, and debt-to-income ratios. However, they often come with higher interest rates and fees. Before choosing a Non-QM loan, weigh the benefits against the potential costs and risks.

If you are a self-employed individual or don’t have the necessary proof of income documentation to get a home loan, consider Top Flite Financial. As an industry leader for credit-challenged homeowners, Top Flite Financial considers applicants that traditional banks and credit unions may have turned down, even if you have a low credit score. Submit a few answers on the questionnaire online to contact a mortgage refinance expert from the Top Flite Financial team to review your options.

What Are the Advantages of Self-Employed Home Loans?

Here are some benefits of self-employed home loans to keep in mind. 

Financial Freedom

Self-employed home loans give you the opportunity to achieve financial freedom by owning a property. Being your own boss often comes with fluctuating income, and traditional home loans may not take that into account. Self-employed loans, however, are tailored to your unique financial situation, allowing lenders to work with you and provide suitable terms and conditions.

Flexibility in Repayment

One of the key advantages of self-employed home loans is their flexibility in repayment options. Unlike traditional loans, self-employed loans often come with features such as interest-only repayment options or adjustable-rate mortgages.

Potential Tax Benefits

As a self-employed individual, you may be eligible for certain tax benefits when you purchase a home. Deducting your mortgage interest and real estate taxes are examples of tax advantages that apply to homebuyers, but self-employed borrowers may have additional deductions available to them. Consult with a tax professional is recommended to capitalize on all potential tax benefits that apply to your specific situation.

Are There Disadvantages to Self-Employed Home Loans?

Unfortunately, there are also drawbacks to consider. 

Possible Higher Interest Rates

When applying for a self-employed home loan, you may get a higher interest rate than those available to salaried applicants. This is because lenders may view self-employed borrowers as riskier due to income fluctuations, making them more hesitant to provide competitive interest rates. 

Stricter Lending Requirements

As someone who is self-employed, you might face stricter lending requirements imposed by mortgage lenders. For instance, lenders may:

  • Request at least two years of self-employment income documentation for mortgage qualification
  • Require a higher credit score compared to traditional borrowers
  • Ask for additional documentation to verify your business income and expenses, such as profit and loss statements

Along with these requirements, you might also need a larger down payment to secure a self-employed home loan. In the end, being prepared with accurate and complete records of your self-employed income history will increase your chances of securing a mortgage on favorable terms.

Is a Self-Employed Home Loan Right for You?

Determining whether a self-employed home loan is the best fit for you depends on your unique financial situation. If you are self-employed and struggle to document your income through traditional W-2 forms, a self-employed home loan may be a viable option for you. Still, keep in mind that self-employed home loans may have different qualification criteria and require additional documentation, which can make the application process more complex. 

Furthermore, self-employed home loans may have higher interest rates and fees than traditional mortgages, which could affect your long-term financial goals. It’s vital to assess your financial situation carefully and compare different loan options before deciding if a self-employed home loan is the right choice for you. 

Seeking advice from a financial advisor or mortgage professional can also provide valuable insights to help you determine if a self-employed home loan is a suitable option.

How to Apply for Self-Employed Home Loans

When applying for a self-employed home loan, the process is quite similar to traditional mortgages. However, there are a few key factors to consider. Follow these steps to increase your chances of success in securing a self-employed mortgage.

  • Step 1: Check your credit score. Your credit score plays a significant role in a lender’s decision to approve your mortgage application. Make sure your credit score is in good standing, and if necessary, take steps to improve it before applying.
  • Step 2: Organize your financial documents. As a self-employed individual, you will need to provide more in-depth financial documentation to prove your income. This includes personal and business tax returns, profit and loss statements, and balance sheets.
  • Step 3: Determine your taxable income. Mortgage lenders base the loan qualification on your taxable income. Be prepared to provide at least two years of tax returns to prove your income stability.
  • Step 4: Reduce your debt-to-income ratio. Lenders prefer a lower debt-to-income ratio, which demonstrates your ability to manage and repay the mortgage. Aim to reduce your outstanding debts before applying.
  • Step 5: Build your savings. Demonstrating a healthy savings account can also be advantageous. It is an indicator of your financial stability and can contribute to a stronger mortgage application.
  • Step 6: Explore different loan options. There are various loan options available for self-employed individuals, including conventional loans, FHA loans, and VA loans. Do your research to determine which option is best for you.
  • Step 7: Connect with a knowledgeable lender. Finally, collaborate with a lender who is experienced in working with self-employed borrowers. They can guide you through the process and help address any potential roadblocks.

You can confidently and successfully apply for a self-employed home loan by following these steps. Remember that being organized, transparent, and financially responsible will make the process smoother and ultimately lead to securing the mortgage you need for your dream home.

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