How to Apply for a Mortgage if You Work for Yourself

If you work for yourself, you can still obtain a mortgage, but you’ll probably need to provide additional documentation to support your income throughout the screening process. Find out more about the requirements, advantages, and disadvantages of applying for a mortgage as a self-employed house buyer.

How to File a Self-Employed Mortgage Application

In the US, there are over 17 million independent contractors, or over 10% of the 157 million workers in the labor force. Even though working for yourself is becoming more and more common, W-2 employees often have an easier time applying to mortgage lenders.

This is a summary of the stages; a more thorough explanation can be found below.

Find out if the IRS regards you as self-employed.

Recognize the prerequisites for a self-employed mortgage.

Gather evidence of your self-employment revenue.

Find out what percentage of your revenue from self-employment qualifies.

Examine several mortgage providers.

If a self-employed person, when is it a good idea to apply for a mortgage?

The dangers and advantages of getting a mortgage should always be carefully considered before purchasing a property. The benefits and drawbacks of applying for a mortgage may differ slightly for purchasers who work for themselves compared to those who have employers.

Taking out a mortgage might be a wise decision if:

For a minimum of two years, your income from self-employment has been consistent and increasing.

Your credit is excellent.

You are able to make a substantial down payment.

You have sufficient cash on hand in case your firm experiences a sluggish spell.

Your intentions to buy a house might wish to be put on hold if:

You recently began operating your own small business or working as an independent contractor.

You’re nearly at the DTI limit.

You don’t have a lot of money saved up or to put down.

You have an average credit score.

What You Need to Apply for a Self-Employed Mortgage

The lender will need to confirm your employment and income in addition to the standard requirements for applying for a mortgage, such as having the appropriate identification, meeting the minimum credit score, and completing the requisite DTI. This is to guarantee that you will be able to pay back your mortgage.

You can provide the W-2 from your most recent tax return together with recent paystubs for W-2 employees. In order to get information regarding your work history, the underwriter may potentially get in touch with your employer.

These kinds of verifications, however, are not accessible for independent contractors. You might be required to submit additional paperwork in its place.

Verification of Employment

Lenders may occasionally request an attestation from a certified public accountant (CPA) to verify employment for self-employed borrowers in order to validate your employment. Additional documents that might be needed for underwriting include customer reference letters, contracts that show client relationships, evidence of business insurance, and a “doing business as” (DBA) certificate.

Verification of Income

Be prepared to have two years’ worth of tax returns as well as state and business licenses (if applicable) requested. Filling out Internal Revenue Service Form 4506-T, which requests a “Transcript of Tax Return,” may be required by some lenders. Verifying income can be aided by 1099 forms, business bank account statements, business profit and loss statements, and accounts receivable in addition to tax returns.

Selecting a Mortgage Provider Who Is Self-Employed

You should conduct thorough research before choosing a mortgage business to make sure you receive a respectable lender and a competitive deal. When looking for a mortgage provider, compare the following factors:

Rates and fees: When researching loans, cost will probably be one of your primary concerns. Examine the fees and interest rates that affect your out-of-pocket expenses.

Customer service: If you are self-employed and have a more involved underwriting procedure, you should engage with a lender that is friendly and attentive to your queries.

Reputation: Go through internet evaluations of the lender and look for any significant legal actions or warning signs about the treatment of previous clients.

Filing a Self-Employed Mortgage Application

Being self-employed entails dealing with a lot of queries and extra requests for documents. For example, you could be asked to explain any notable changes in your income. To be ready, compile all of your company’s financial statements and maintain thorough documentation so that you can react to inquiries promptly.

Ascertain Whether the IRS Views You as Self-Employed

The IRS defines self-employment as any circumstance in which an individual works as a partner in a firm, a solo owner, or an independent contractor. You do not work for an employer as a W-2 employee. Instead, you get income reported as 1099-NEC, 1099-MISC, or 1099-K.

Recognize the Conditions for a Self-Employed Mortgage

If you work for yourself, the primary variations in mortgage criteria are related to your occupation and income. The standards for your debt-to-income ratio and credit will remain the same. The lender will want to see two years’ worth of company and personal financial records (or tax returns) and, preferably, an increasing trajectory in your income because self-employed people don’t receive a fixed wage each year.

Assemble Evidence of Self-Employed Wage

The process of proving self-employment income differs slightly from that of W-2 workers. Lenders may request to view a variety of papers, beginning with your tax returns (often the last two years’ worth), due to the possibility that your income may fluctuate and originate from several sources. Bank statements for company accounts, 1099s, contracts or invoices from customers, account receivables, client letters, etc. are additional possible sources of revenue documentation.

Assess What Portion of Your Self-Employed Income Is Eligible

Keep in mind that net income, not gross income, is what mortgage firms will consider. Thus, even while deducting company expenditures from taxes could be advantageous, having a lesser income may make it more challenging to get accepted for a mortgage.