Mortgage Options for Self-Employed

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

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If you’re self-employed, you may be wondering whether you can easily get approved for a mortgage. Unfortunately, applying for a mortgage as a self-employed borrower can generally be harder than if you were an employee. 

Mortgage lenders typically require proof of income for mortgage approval, which can be challenging if you don’t have W-2s or recent pay stubs. Proving your income as a freelancer, independent contractor, or gig worker requires more paperwork than W-2 employees. As long as you meet the loan requirements and can document your income, being self-employed shouldn’t stop you from pursuing your dream of purchasing or refinancing your home.

Here’s what you need to know about mortgages for self-employed, what lenders look at, the steps in getting a mortgage if you’re self-employed, and the available mortgage options.

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 Are Considered Self-Employed Individuals When Applying for a Mortgage?

Mortgage lenders define “self-employed borrowers” as anyone who is not a W-2 employee or one with 25% or more ownership interest in a business. Most lenders require at least two years of proof of self-employment income to qualify for a home loan, as per Fannie Mae and Freddie Mac guidelines.

The two-year rule doesn’t apply in some situations, though. For example, you might qualify even with one year of self-employment, provided that you show a two-year track record in the same line of work. Some lenders may even count one year of self-employment in addition to one year of formal education as a qualification. 

If you’re self-employed for less than a year, it might be difficult to secure a mortgage loan.

Is It Harder to Get a Mortgage If You Are Self-Employed?

The short answer is no, as long as you meet the loan requirements. Generally, lenders need to confirm whether self-employed borrowers can repay their loans. They’ll need to see that your income is high enough to make mortgage payments and that you have a good track record of repaying your debts.

Disadvantages of Getting a Mortgage If You Are Self-Employed

Most lenders see self-employed individuals as high-risk borrowers because of their unstable gross monthly income. For this reason, you will need to provide more paperwork if you are self-employed than you would if you were an employee of a company. 

Another disadvantage of getting a self-employed mortgage is that you’ll end up paying higher interest rates. This is because lenders usually charge high rates to lower their lending risk. In addition, you’ll also pay a hefty down payment, which varies by lender but is generally at least 20%. 

What Do Lenders Look at for Self-Employed?

When you’re looking to get approved for a self-employed mortgage, lenders typically look at your income, credit report, and debt-to-income ratio. Some lenders will also look at the amount you plan to put down. They will also check the stability of your business to see whether it can generate enough income in the future. These factors help them evaluate your eligibility for a loan.

How To Get Mortgages for Self-Employed?

If you’re looking to get a self-employed mortgage, the following tips will help improve your odds of approval.

1. Review Your Personal and Business Finances

Before you even start going around and shopping for a mortgage, it’s prudent to assess your personal and business finances. Ensure that you’ve documented your income 一 file your personal and business income separately to ease the mortgage process. 

The easiest way to keep track of your business’s finances is using professional software or a simple spreadsheet. Knowing every detail of your personal and business finances is vital as it will help you move one step closer to your mortgage approval.

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.

2. Check Your Debt-To-Income (DTI) Ratio

Debt-to-income ratio is a metric used by lenders to evaluate a borrower’s risk. The higher your DTI ratio, the riskier you’re to lenders. Lenders prefer to work with self-employed people with low DTI ratios since it shows they can manage their monthly payments. The standard DTI requirement is 43%, but the lower, the better. 

3. Prepare Your Down Payment/Collateral

Lenders will require you to make a down payment during the mortgage application process, typically 20%, but this varies by lender. In addition, some lenders will require collateral to back up the loan. Generally, this boils down to your finances; that’s why reviewing them is crucial.

4. Gather Proof of Income and Other Documents

Most lenders require proof of stable income to ensure that you can repay your loan. Your lender, for example, may request your personal and business tax returns to demonstrate your self-employment income. 

Lenders may also ask for personal and business bank statements, profit and loss statements, balance sheets, and other paperwork like a business license if you’re running one. Gathering the right documents before applying for a self-employed mortgage will streamline the process.

5. Research Lenders

Finally, shop for the best lender. When researching lenders, here are some of the things to consider:

  • What will the down payment be?
  • What interest rates do they offer? Consider lenders with lower interest rates.
  • What do you need to provide to get approved?
  • How long does it take to get approved and funded?

What Are Your Mortgage Options as Self-Employed?

As a self-employed borrower, you have several mortgage options to consider, including:

Asset Qualifier Home Loan

An asset qualifier home loan is a mortgage product that allows you to use your liquid assets to secure a loan. Liquid assets are those that can be quickly converted into cash within a short period of time. This can include retirement accounts, investment accounts, checking and savings accounts. Depending on the lender, you’ll need a certain amount of liquid assets to qualify for an asset qualifier home loan.

Bank Statement Loan

A bank statement loan allows self-employed individuals to get a mortgage using their bank statement deposits instead of recent tax returns or pay stubs. For most lenders, you’ll need 12 to 24 months of personal and business bank statements to prove your net income. You’ll also need to provide proof of self-employment and additional paperwork.

Investor Cash Flow Home Loan

If you’re a real estate investor, you can use the cash flow from your rental property to secure a mortgage loan. Whether you’re looking to build your real estate portfolio or need quick access to funds to finance remodeling or renovation of your rental property, an investor cash flow loan is a perfect option. 

ITIN Mortgage Loan

An Individual Tax Identification Number (ITIN) mortgage is a loan program for borrowers who are not eligible for Social Security numbers. It’s hard to qualify for a mortgage in the U.S. if you do not have an SSN. With an ITIN card, you can easily get approved for a home loan.

Jumbo Home Loan

A jumbo loan is a mortgage for homebuyers purchasing properties exceeding the conforming limits set by Fannie Mae and Freddie Mac. The maximum amount for a conforming loan in 2022 is $647,200 in most states, as stated by the Federal Housing Finance Agency. Requirements for a jumbo loan vary depending on the lender.

Now that you know the mortgage options for self-employed, where do you apply? You can get a self-employed mortgage through Angel Oak Home Loans. The full-service lender offers various non-QM mortgage products for self-employed borrowers, including bank statement loans, asset qualifier home loans, investor cash flow home loans, ITIN mortgages, Jumbo loans, and a foreign national program. 

Visit Angel Oak Home Loans and complete an online form to find a loan officer or get a quote for a self-employed mortgage.

Angel Oak

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