Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
How to get a mortgage if you’re self-employed
You’ll need to show steady income and a solid credit score to get approved.
Updated . What changed?
One of the largest expenses most of us will face is buying a home. And if you’re self-employed, it can be more difficult during the COVID-19 pandemic to qualify for a loan you can afford. If you’re a gig worker, sole-proprietor or independent contractor, you’ll need to demonstrate steady work history and recent tax returns to get a mortgage.
Recent changes for self-employed mortgages
In response to the economic uncertainty caused by the coronavirus pandemic, the home loan industry has seen some massive changes. And, unfortunately, self-employed workers are bearing the brunt of these new policies. Before the pandemic, someone who was self-employed could have been approved for a mortgage with outdated financials, a mediocre credit score and a down payment of 10% or less. Now, however, lenders require more recent proof of income, a higher FICO score and a down payment of at least 20%. Yet despite the new rules, it’s still possible to secure a self-employed mortgage — but only if you’re properly prepared.
How to qualify for a mortgage if you’re self-employed
If you’re thinking about applying for a self-employed mortgage, consider these tips that could help you get the green light from a potential lender.
- Raise your credit score. Lenders such as JPMorgan Chase now require applicants to have a minimum FICO score of 700. If you need to increase your score, there are many ways to do so.
- Lower your debt-to-income ratio (DTI). The difference between how much you earn monthly and what you owe is critical to a lender’s decision. Aim to reduce your monthly bills before applying.
- Organize your accounting. The more evidence you have to back-up your income, the more likely you’ll be to qualify for a mortgage. Gather your bank statements, tax returns, profit-and-loss statement, monthly expenses and a list of assets. If you can get a signed statement from an accountant, you’ll be even better off.
- Prove you’re making money. Previously, you only had to show that your business made money in the past 120 days. Now, the window is 10 days. To prove you’re still profitable, provide a recent paystub or bank account statement showing deposits.
- Aim to leave a larger down payment. If you can afford a down payment of 20% or more, you’re more likely to be approved.
What documents will I need?
Although banks and brokers have different lending criteria for self-employed mortgages, here are the documents you’re most likely to need in 2020:
- Bank account statements. Compile your personal and business bank account statements from the past 60 days. Anything older than that is not relevant to lenders.
- Year-to-date profit-and-loss statement. Provide either an audited profit-and-loss statement or an unaudited statement accompanied by the past two months of your business’s financials.
- Balance sheet. Provide an overview of what you own and what you owe. Include all income and assets assessed within the past 60 days.
- Tax returns. Prepare to present your personal and business tax returns from the past two years.
- Business license. This government-issued document proves the existence of your business entity.
- Current receipts and contracts. It’s not always required, but having these documents ready may give your lender added peace of mind.
Try a personal essay
Although it’s not necessary, providing a written explanation about how and why your business will survive the pandemic could possibly spell the difference between approval and denial.
How to apply
If you’re confident you can qualify for a self-employed mortgage, here’s an overview of how to apply.
- Calculate what you can afford. Determine the amount you can afford for a down payment, your monthly mortgage payments, possible HOA fees and other costs associated with buying a home.
- Compare lenders. Compare fees and interest rates from multiple credit unions and online lenders. Determine which lenders are most likely to approve you based on your income, credit score and down payment. Loan marketplaces are a good place to start.
- Complete loan applications. Fill out mortgage applications online, by phone or in person from a few promising lenders. Expect to submit financial documents and personal information.
- Underwriting process. It can take a few days for lenders to investigate your finances and determine your approval.
- Preapproval. Get a preapproval letter with the amount you can borrow to start looking for homes you can afford. A preapproval can show a seller that you’re serious about buying.
Compare more mortgage lenders
What to watch out for
Not all mortgage lenders abide by above-board practices, and some unscrupulous lenders attempt to squeeze every dime they can from their customers. To help you avoid predatory lending and get the best deal, here are some red flags to keep an eye out for:
- High fees. Lenders that charge percentage-based fees often call them mortgage points or discount points. If a lender is asking for more than three points, keep shopping.
- Hidden charges. Some lenders intentionally omit taxes and insurance payments in their calculations. Ask if these line items are included in the monthly payment a lender proposes.
- Prepayment penalties. Find out if a lender charges a fee for prepaying your mortgage early if you plan to refinance for a lower term, sell or pay off your loan before the term is up.
- Be wary of lenders that approve anyone. Expect to pay high rates and fees to lenders that boast about accepting bad-credit applicants.
- Yield-spread premiums. Lenders pay brokers rewards for unnecessarily inflating interest rates. If you’re working with a broker, make sure they aren’t trying to sneak this past you. Keep an eye out for service release fees, rate participation fees and par-plus pricing, which are all industry terms for yield-spread premiums. As a rule of thumb, if you’re not paying an origination fee, you’re likely paying this premium.
Due to the pandemic, mortgage rules are now more stringent than they’ve been in the past. But if you have a steady source of verifiable income, now’s an excellent time to buy. If you’re ready to take the first step toward homeownership, start by comparing rates and lenders and learning more about how mortgages work.
Frequently asked questions
More guides on Finder
Mold removal services
Got a mold problem? Here’s what to know before you hire a professional including where to find one, costs and frequently asked questions.
Stores that will refund you if prices drop for Black Friday
Here’s what you need to know about price protection policies ahead of Black Friday, from time frames to product exclusions.
VPN by Google One review
Google has rolled out its own virtual private network, called VPN by Google One. If you’re thinking about signing up, here’s what you need to know.
How to get a divorce without a lawyer
It’s possible to consciously uncouple without the hefty attorney fees, but it takes some preparation on your part.
How to get health insurance
The best time to buy an affordable policy is NOW — during the annual open enrollment period.
Here’s how Equifax’s new Cashflow Insights could help you get approved for a loan
Equifax launched a new product that lets you volunteer your bank account information when you apply for a loan. Here’s how you could benefit.
QuickerCash short-term loans review
This connection service is transparent about rates — but asks for lots of personal information before you know where it’s going.
What you need to know about reverse mortgages
A reverse mortgage could let you use some of your home’s equity to fund your retirement costs — but being aware of the risks is crucial.
How much will I get from disability insurance?
Disability insurance typically pays out between 40% and 80% of your income, but will depend on the type of policy you have.
What is divorce mediation?
A cheaper alternative to going to court that helps couples resolve issues together.
Ask an Expert