Self-employed home buyers are common today

According to Gallup, nearly a third of all Americans are self-employed in some capacity. That means a large share of U.S. home buyers are using self-employment income to get mortgage-approved.

While this can be a bit more challenging than buying a home with ‘traditional’ income, the extra hurdles are nothing self-employed buyers can’t overcome.

If you know what to expect and have the right paperwork in order, being self-employed shouldn’t get in the way of your plans as a first-time home buyer.

In this article (Skip to…)

• No W2s needed
• Types of self-employed mortgages
• Eligibility requirements
• Challenges for self-employed buyers
• Today’s mortgage rates

‘Standard’ mortgage loans available to all home buyers are also available to self-employed borrowers. These include conventional loans (backed by Fannie Mae and Freddie Mac), FHA loans, VA loans, USDA loans, and jumbo loans.

All major loan types require at least two years of self-employment history to qualify.

However, many lenders and loan programs are flexible. You can often get approved with only one year of self-employment history, as long as you worked 2 prior years in a related field and earned a comparable or greater income.

The best mortgage for you will depend on your goals. 

For instance, do you have good credit, 20% down, and want to avoid mortgage insurance? Then a conventional mortgage is best. 

A government-backed loan (FHA, VA, or USDA) is often better if you need looser eligibility requirements. 

FHA loans allow a credit score as low as 580 and are more flexible about credit history. If you qualify for VA or USDA financing, no down payment is required. 

You can compare the different types of home loans in more detail here.

Bank statement mortgages

Often, the big challenge for self-employed borrowers is not whether they can get a mortgage but they can get approved for.

That’s because mortgage lenders only count taxable income on your mortgage application. And self-employed workers — as you likely know — tend to write off as many of their business expenses as possible.

While large write-offs can save you money at tax time, they might hurt your home buying prospects.

When a lender looks at your tax returns, your income could look smaller than it really is. And that means you might qualify for a smaller loan amount than you can truly afford.

Enter the ‘bank statement loan.’

Bank statement mortgages were created as an alternative solution for self-employed home buyers with large tax write-offs. Instead of qualifying based on your tax returns, these loans allow you to qualify using ‘real’ income shown on your bank statements.

Bank statement lenders typically look at your past 12-24 months’ worth of bank statements to find your average monthly income, which could be greater than the income shown on your tax returns.

However, there’s a downside.

Bank statement loans are considered non-qualified mortgages (Non-QMs). As such, they’re not available from all lenders and often have significantly higher rates than the standard mortgage loans discussed above.

Thanks to their lower interest rates, first-time self-employed buyers often prefer conventional or government-backed mortgages over bank statement loans.

Portfolio lenders

Most mortgages are originated by lenders and then sold to investors through the secondary market. However, there are some lenders — so-called ‘portfolio lenders’ — who keep some of their loans after origination.

Because such mortgages are not being sold to investors, they do not have to meet investor or program requirements. Instead, the bank can make its own standards for borrowers.

Bank standards are often more open to the self-employed. If you have a personal or business account with a local bank, be sure to ask about portfolio mortgages.

Self-employed borrowers will document their income differently than W2 employees. But aside from that, you have to meet the same requirements to buy a house as anyone else.

Typical eligibility requirements to get a mortgage include:

• At least 2 years’ employment history (self-employment history, in this case)
• Stable, reliable income
• A credit score of at least 580 (FHA loan) or 620+ (conventional, VA, or USDA loan)
• A clean credit report
• Manageable monthly debt payments. Learn more about your debt-to-income ratio (DTI) here
• Cash for the down payment and closing costs
• Proper documentation, including things like a business license and profit and loss statement, if applicable. Your CPA can help you gather your documents

The upfront cash requirement can be a big obstacle for first-time home buyers.

Although many can get a loan with just 3% down, closing costs add another 2-5% — bringing your total upfront costs to at least 5-8% out of pocket.

Luckily, there are creative ways to cover your down payment and upfront fees if your savings account is a little thin.

Lenders will accept cash down payment gifts or funds from down payment assistance programs. And many offer lender credits, which allow the lender to pay your closing costs. (Though in exchange, you’ll pay a higher interest rate.)

The point is that lenders are flexible, and it’s often easier to get approved for a mortgage than first-time buyers expect.

And if you were recently unemployed, you’ll have to wait until you’re back in a stable job to get financing.

But, if you’ve stayed employed throughout the pandemic, you should still be able to get a mortgage. You just might have to search a little harder for a lender that will work with you.

Don’t give up! If you’re qualified, financing options are out there. And as vaccinations continue and the economy recharges, things should become easier.

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