How to get a mortgage when you're self-employed

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If you own a business, work freelance gigs or earn your income in non-traditional ways, getting a mortgage may look slightly different. While the application process is similar to that of a traditional home loan, qualifying for a mortgage when you’re self-employed involves more documentation and outside-of-the-box loan products.

Learn how the process works and how to put your best foot forward to qualify for the best current mortgage rates as a self-employed mortgage borrower.

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Who is considered a self-employed mortgage borrower?

W-2 employees provide recent pay stubs and two years of federal tax returns to show proof of income and employment—pretty straightforward stuff.

However, being “self-employed” usually means you own 25% or more of a business, receive 1099 income for services you provide to clients or use Schedule C to document your income when you file your personal tax returns.

According to Fannie Mae, “self-employed” borrowers can include sole proprietors, freelancers and contract workers, or people who run their companies as a partnership, limited liability company (LLC) or a corporation.

Qualifying for a mortgage when you’re self-employed

The process of qualifying for a mortgage when you’re self-employed isn’t all that different than if you were a salaried employee, but it does require more documentation. Lenders pay close attention to your taxable income and how consistently you’ve earned that income over the past two years.

When you’re self-employed, your accountant or tax advisor will typically advise you on ways to minimize your taxable income through write-offs and deductions. While it’s great for your business, this strategy can sometimes work against you when applying for a mortgage, says Mason Whitehead, a Dallas-based producing branch manager with Churchill Mortgage.

For example, if your business made $500,000 over two years but you wrote off $450,000 in business expenses, your taxable income is only $50,000—and that’s the figure lenders use to qualify you for a mortgage, Whitehead points out.

“In most cases, that won’t get you much of a house unless you have a lot of money for a down payment,” Whitehead says.

Loan options if you’re self-employed

Government-backed loans

Government-backed loans such as FHA, USDA and VA loans typically require two years’ of tax returns. Your taxable income is averaged out over those two years if your income increases, Whitehead says. However, if your income declines during that time frame, your lender uses the most recent year of income, he adds.

“But if it goes down too much (generally 20% or more), it can be an automatic denial,” Whitehead says.

With an FHA loan, which requires just 3.5% down, you’ll pay upfront and annual mortgage insurance premiums. Some USDA loans for homes in eligible rural areas and VA loans for military borrowers don’t require a down payment, but will require a guarantee or funding fee.

Conventional loans

Typically, conventional loans also require two years of tax returns, but in some cases, lenders may be able to qualify you with just one year of tax returns as long as it represents a full 12 months of business operations, Whitehead notes. However, this also means you need a higher credit score, a low debt-to-income (DTI) ratio and a larger down payment, he adds.

Conventional loans have the best possible rates, however, a self-employed borrower is qualified based on their net income reported to the IRS. This is a big difference because W-2 borrowers are qualified on gross income (before taxes). You’ll also need a credit score of at least 620 for a fixed-rate conventional loan (640 for an adjustable-rate mortgage), but a higher score will earn you lower rates.

“This makes it more difficult to qualify for a conventional loan as a self-employed borrower, because many business owners write off as much as they can,” says Steve Hill, a mortgage broker with SBC Lending in Redondo Beach, California. ”That’s great for a low tax bill but makes it more difficult to get approved for a home loan.”

Non-qualified mortgages (non-QM)

If you don’t meet the requirements for a traditional qualified mortgage, your lender may offer a non-QM loan as an option. Non-QM loans are not considered “qualified” loans because they don’t meet the lending rules set by the Consumer Financial Protection Bureau (CFPB). However, that doesn’t mean non-QM borrowers are incapable of repaying a mortgage.

Non-QM lenders can approve you based on alternative financial documentation, such as bank statements, assets and one year of tax returns. Keep in mind, though, that non-QM loans have slightly higher rates than conventional loans.

“Non-QM with bank statements is extremely popular right now because the rates aren’t that much higher than conventional,” Hill says. “When a business owner compares the higher interest rate of a bank statement loan to the higher tax bill of reporting more income for one to two years, the higher interest rate is usually the better deal.”

Documents you’ll need for your mortgage application

Self-employed borrowers may need to provide a few extra documents with their mortgage application. These include:

Two years of personal and business tax returns.
Two years of K-1 statements for any business or entity of which you own less than a 25% stake. (If you own 25% or more, you’ll need two years of federal tax returns.)
30 days of pay stubs (if you pay yourself as an employee).
60 days of personal bank statements.
90 days of business bank statements, all pages (non-QM loans require 12 months).
60 days of profit-and-loss statements from your business.
30 days of investment and/or retirement account statements.
A letter from your CPA affirming your business is in good standing.
A government-issued ID, such as a driver’s license.

Your lender will give you a specific list of documents to submit based on the loan program you’re applying for.

Common challenges for self-employed mortgage applicants

The most common challenge for self-employed mortgage applicants is understanding the difference between what lenders recognize as taxable income and how much they “made” in their business, Whitehead says.

“Many people may expense things that are questionable and they want us to understand their situation, but it’s pretty black and white [for us],” says Whitehead. “I recommend that if you want to buy a home and you are self-employed, take all allowable deductions. But remember, if you pay Uncle Sam, you may find it easier to qualify for a lower-rate mortgage and get the house you want at a lower monthly cost.”

Working with your CPA, do the math to see what makes better sense—paying more in taxes or paying a higher mortgage interest rate for your home. In some cases, it may be ideal to pay a slightly higher mortgage rate and take every allowable deduction/write-off on your tax returns.

Early preparation is key to overcoming potential mortgage hurdles, says Hill.

“Plan ahead. Start working with your lender the year before you want to buy or refinance,” Hill says. “And have all your documentation handy. Having a complete picture is what helps us more than anything else.”

5 steps to set your mortgage application up for success

If you think buying a home is on the horizon and you’re self-employed, plan ahead as early as possible with these steps.

Consult with your CPA or tax advisor. Working with your tax professional a year or two before buying a home is on your radar will help you prepare for mortgage approval.
Save up for your down payment and closing costs. Having a large down payment isn’t required to get approved for a home loan, but it does provide you with more competitive interest rates. If you put 20% or more down, you’ll also avoid private mortgage insurance on conventional financing. Also, you’ll need about 2% to 6% of your loan amount to put toward closing costs.
Check your credit score. Your credit score is a major factor in the interest rate you qualify for. The higher your credit score, the lower your rate offers will be, potentially saving you thousands of dollars in total interest over the life of your loan. To boost your score, focus on paying down your account balances and making on-time payments.
Gather your business documents. Lenders require a lot of personal and business documentation for self-employed borrowers, so gather all the documents outlined above, as well as a list of personal assets, liabilities and statements for any other types of income you earn.
Shop around for a lender. Ask other business owners who they’ve used to get a mortgage, or search online. It’s a good idea to shop around with at least three different lenders to compare rates and loan products.

The takeaway

Getting a mortgage when you’re self-employed is entirely possible, but be prepared to provide more documentation showing consistent income as well as in-depth information about your business operations. Find a mortgage lender with ample experience in working with self-employed borrowers.

Frequently asked questions

How do I determine if I’m considered self-employed?

If you own 25% or more stake in a business or earn your income from contract 1099 work, you’re considered self-employed. Most self-employed workers don’t receive traditional W-2 salaries from an employer (unless they’ve set their businesses up to pay themselves a regular salary).

Can I still get a mortgage if my income fluctuates?

You can, but lenders still need to see consistency in your taxable income. While a two-year period of consistent income is preferred, you may be able to qualify for some mortgages if you’ve earned a consistent income from your business for at least 12 full months.

What if I’ve been self-employed for less than two years?

You might still qualify for a conventional mortgage if your business has been operating for at least 12 full months and you can show proof through tax documentation of a year’s worth of income from that business.

Is there down payment assistance for self-employed homebuyers?

If you qualify for a government-backed or conventional loan, you might be able to get down payment assistance to help with your down payment or closing costs—even if you’re self-employed. Many down payment assistance (DPA) programs have income limits or apply exclusively to first-time homebuyers. Your lender can provide you with DPA options based on which loan you qualify for.

What type of mortgage is best when I’m self-employed?

It depends. You may be able to qualify for traditional financing, such as a government-backed FHA, VA or USDA loan, or a conventional loan if you’ve earned verifiable, consistent income over the past two years. If not, a non-QM loan that considers bank statements, asset-only statements or 12 months of continuous income may be ideal for you.

America’s most popular mortgage term is the 30-year home loan.
Planning to buy a home that exceeds the FHFA’s conforming loan limits? A jumbo mortgage is probably your best option.
Some borrowers prefer 15-year mortgages to save on interest.
If your credit has some dings, an FHA loan may be the way to go.
Military members and veterans may be able to buy a home with no down payment by using a VA loan.
If you’re buying in an eligible rural area, and fit the income criteria, a USDA loan could make homeownership possible.
Those seeking a lower rate or different loan term should take a look at refi rates.
While most borrowers prefer fixed-rate loans, adjustable-rate mortgages can be a good choice in specific situations.

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About the contributors

Deborah KearnsPersonal Finance Expert

Deborah Kearns is a freelance contributor to Fortune Recommends and an award-winning personal finance journalist and housing expert. You can find her bylines in The New York Times, MarketWatch, CNN, NerdWallet, The Associated Press and many other publications. Deborah lives outside of Denver, Colorado, with her husband, two kids and their rambunctious rescue pup.

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Ehab ZahriyehSenior Staff Editor

Ehab is a senior staff editor at Fortune Recommends. Ehab's passion is helping readers in making sound personal finance and small business decisions. Ehab has been an editor for over 15 years. Prior to Fortune, he led commerce content teams at Digital Trends, and Merriam-Webster. He also freelanced for various publications including PCMag and Men’s Health.