A guide to getting a mortgage when you're self-employed

Self-employed workers, including contractors and freelancers, may have a more difficult time qualifying for a mortgage since their incomes may be less predictable than full-time or salaried workers. Lenders may require additional income documents, and credit score requirements to buy a house may also be higher.

However, self-employed people can still get a good mortgage if they can show that they have general financial stability and that they expect to earn enough to make future mortgage payments.

Can you get a mortgage if you’re self-employed?

Yes, you can get a mortgage if you’re self-employed. Your job doesn’t necessarily impact whether or not you can get a mortgage and neither does your employment status. You may have a harder time getting a mortgage if you have little to no income, but it isn’t impossible.

"The main challenges that most self-employed people face stem from being able to properly document their income to meet Fannie Mae or Freddie Mac income calculation guidelines,"  according to Adam Kanak, Senior Mortgage Sales Manager at Orchard Mortgage. "In most instances, self-employed borrowers will need to have a minimum of a two year proven history of income receipt. This income history typically will be verified through tax returns and a profit and loss statement."

How self-employed people can qualify for a mortgage

The process of getting a mortgage for self-employed people is the same as it is for others, but there are a few steps you can take to increase your chances of qualifying if you're self-employed:

• Get your finances in order before you apply.
• Be realistic about what you can afford.
• Shop around for the right mortgage.
• Make the biggest down payment possible.
• Consider a joint mortgage.

Get your finances in order before you apply

Self-employed workers may need to meet higher credit score requirements, so pay down existing debt and improve your credit score if possible before you apply for a mortgage. Many self-employed people will also need to give additional proof that they’re financially stable, so collect any records that show your income, a reliable debt payment history, and how much you have in liquid savings. Lenders will also feel better about your application if you show a long history of self-employment.

"Dramatic decreasing income variances year over year are also something to be mindful of," Kanak says. In a post-pandemic world this isn’t quite as profound of an issue, however, life happens and sometimes businesses go through rough patches.

He continues: "If your business does have a decrease in income from one year to the next, your income can still be qualified as long as you have the ability to show that your business has stabilized. Keep in mind that in the most simplistic terms, an underwriter’s job is to calculate the risk of lending money based on a borrower’s ability to repay — with this, consistency goes a long way for freelancers and self-employed people."

Be realistic about what you can afford

Ideally, your mortgage payments should be affordable every month, even if you were to have one or more months of lower income. Plan ahead for months when you earn less income because the last thing you want is to go through a low-earning period, miss some mortgage payments, and then have a lien placed on your home or lose your home for nonpayment.

Remember: Paying for a house is more than just a mortgage. You’ll also pay closing costs, homeowners insurance, property taxes, and other small expenses.

Learn how much money should you save to buy a house.

Shop around for the right mortgage

Most people choose a 30-year fixed-rate mortgage, which has the same monthly payment for the whole mortgage term. Fixed-rate mortgages are a good option if you want predictable payments, but someone who can’t get a good rate during their initial application may want to consider an adjustable-rate mortgage. Government-back mortgages, like FHA, USDA, and VA loans also have lower credit score and down payment requirements. Shorter loan terms, like 15-year or 20-year mortgages are also an option if you want to pay off the loan more quickly.

Learn how to shop around for the right mortgage

Make the biggest down payment possible

Making a larger down payment will give you smaller mortgage payments and save you thousands over the lifetime of your loan. Lenders will also feel better about offering you a loan if you pay more up front. Not all mortgages require a big down payment, though. Some mortgages, like USDA loans, don’t require any down payment. However, private lenders will likely include private mortgage insurance (PMI) if your down payment is less than 20%.

Consider a joint mortgage

Getting a joint mortgage with a spouse or other person can greatly help you, especially if that person has a salaried income or a higher credit score than you. Having someone cosign your mortgage is also another option.

What documents do self-employed people need to get a mortgage?

The mortgage application process will require you to show many documents, starting with your identification and Social Security number. If you aren’t a citizen, you can still get a mortgage, but some lenders may offer you higher interest rates or have additional requirements.

Documents you'll need for a mortgage application include:

• Income documents: Have multiple years of your W-2 forms, 1099 forms, Schedule K-1, and any other forms that disclose your income. Include income from any side jobs and don’t forget possible non-work income, like investment gains, alimony, or gifts from family.
• Proof of current income: Prepare your pay stubs, bank statements, or similar to prove you’re making money right now. Showing that you’ve been successfully self-employed for years can also help.
• Bank statements: Recent bank statements for all your bank accounts could be necessary for a self-employed person to prove that they’re financially stable or already have significant savings. Don’t forget statements from any investment accounts.
• Personal income tax returns: Have multiple years of returns ready. Showing long-term financial stability can help you secure a loan.
• Business tax returns: For anyone who files a separate return for their business, a lender may want to see if the business earns steady income.
• Information about other debts: Your debt-to-income ratio is very important to lenders. Gather your documents showing the total balance, monthly payment amount, and payment history for auto loans, personal loans, student loans, business loans, and other debt.
• Documents from co-applicants: If you apply with a spouse or other co-applicant, they will need to provide the same information.

Ultimately, your goal during the mortgage process is to show the lender all documents you have to prove that you have historically earned enough to afford a mortgage and that you will continue earning at a similar income level in the future.

6 types of mortgages for self-employed people

Most people get a fixed-rate mortgage from a private lender, such as a private bank, but some people may find better rates elsewhere. For example, someone with fluctuations in their income or credit history may get high rates from a private lender and thus may want to consider an adjustable-rate mortgage.

Here are six types of mortgages to consider:

• Fixed-rate mortgages
• Adjustable-rate mortgages
• Private loans
• FHA loans
• USDA loans
• VA home loans

Fixed-rate mortgages

Fixed-rate mortgages have the same monthly payment for the whole mortgage term. This is the most common type of mortgage loan. A fixed-rate mortgage is a good option if you want predictable monthly payments. If your income changes monthly, having a fixed payment amount to plan for each month may be helpful. If you can qualify for a low interest rate up front, fixed-rate loans also lock in that low rate for the whole length of the mortgage.

Adjustable-rate mortgages

An adjustable-rate mortgage has one interest rate for a predetermined number of years and then your interest rate will change based on the market. For example, the first 10 years of your loan may have one interest rate, and then your rate will change every year afterwards to match the market rates from your lender.

Your monthly mortgage payments will change when your interest rate changes, so you may want to avoid adjustable-rate loans if you don’t think you’ll be able to handle some months or years with higher mortgage payments. On the other hand, you may want an adjustable rate if your starting interest rate is very high (like because you have low credit), and there’s a chance for lower rates in the future.

Find out what affects mortgage rates.

Conventional mortgages

Most people get a conventional mortgage from a private lender, such as a local bank or an online mortgage lender. Especially consider a private lender if you already have a relationship with them and can get a lower rate. For example, check to see if your bank offers better rates for long-time customers. Unfortunately, private lenders may have stricter lending requirements and you may have a hard time getting a low interest rate if your income varies widely, you already have significant debt, or you don’t have the best credit history. Requirements have also gotten more strict during the pandemic. 

FHA loans

FHA loans, from the Federal Housing Administration, are easier to get for people who have low credit scores, and they only require a 3.5% down payment. Another potential benefit to FHA loans is that you can use gifts (money gifted to you from a family member) for your down payment.

USDA loans

USDA loans are available to low and moderate income homebuyers looking for a home in certain rural areas. Many places won’t qualify for a USDA loan, but you can get one with a lower credit score and with a down payment as low as 0%.

VA home loans

You can only receive a VA loan if you have served in the United States military, but if you qualify, these loans backed by the Department of Veterans Affairs offer down payments as low as 0% and no mortgage interest.

Can I refinance if I'm self-employed?

Self-employed people can refinance their mortgage just like people with salaried jobs, and how difficult it is depends on your circumstances and the type of loan you're applying for.

In general, a self-employed borrower likely will be asked to provide more documentation and information than someone with a salaried, W-2 position. But "if you were self-employed when you purchased your home and your demonstrable income has been stable the process shouldn’t be any more arduous than at purchase," Kanak says. "While additional documentation does open more information to be scrutinized by an underwriter, it shouldn’t dissuade homeowners from looking at improving their financial positions."

Government sponsored loans programs (FHA and VA) have different streamline rate and term refinance options available. In some cases with streamline refinance, a combination of credit, income, and an appraisal may not be needed as long as there’s a net-tangible benefit for the borrower. These programs are for homeowners that currently have either FHA or VA loans on their primary residence and refinance back into that same loan program at a lower interest rate.

Kanak also says that self-employed people looking to refinance a mortgage should be cognizant of their tax write-offs: "If you’re self-employed, you likely know that it can be beneficial to take business related write-offs to reduce your taxable income. While this practice is great come tax time, this could reduce your net qualifiable income once a lender does their income calculations."

Tips to find the best mortgage lender for self-employed people

There are thousands of lenders (and brokers), so here are some tips to help you pick the best mortgage lender:

Talk to local lenders. Your local bank or credit union may offer lower rates to long-time customers. Also ask your friends and family for recommendations. A referral may help you get a lower rate. Having a local lender isn’t a requirement though — if local rates are high, shop around.

Check rates from online lenders. There are a number of legitimate online mortgage lenders and brokers and they can often give you lower interest rates because they save on some of the costs that physical lenders pay (like the cost of maintaining a physical branch). But always be safe online. Check reviews to make sure a company is legitimate before you enter personal information, and ideally you should have a secure internet connection (“https” at the start of the search bar).

Don’t let any lender pressure you into a loan. A good mortgage lender will answer all your questions, discuss all your options, and make sure you’re comfortable. For example, if you think you might be interested in a 15-year adjustable-rate mortgage, a good lender will explain exactly why they think that is or isn’t a good option for you. If a lender makes you feel pressured or uncomfortable, find another lender. You’re going to make payments to this lender for decades, so having a good working relationship is important.

Learn how to get pre-approved for a mortgage

FAQs

Here's more information on getting a mortgage or refinancing one when you're self-employed.

Q: Is it harder to buy a house if you're self-employed?‍

Purchasing a house can be more challenging for self-employed individuals due to the additional documentation and scrutiny involved. Lenders typically require thorough income verification, including tax returns and financial statements, to assess your ability to repay the mortgage.

Q: How many years of self-employment qualify for a mortgage?‍

Generally, lenders prefer self-employed individuals to have a minimum of two years of self-employment history to qualify for a mortgage. This allows them to assess your income stability and business viability. However, specific requirements may vary among lenders.

Q: What forms can you use as proof of income for a mortgage?‍

As a self-employed individual, you can provide various forms of income documentation for a mortgage, including tax returns (usually two years), profit and loss statements, bank statements, and signed client contracts. These documents help establish your income stability and repayment capacity to lenders.