How to Get a Home Loan While Self-Employed

About 16 million Americans are self-employed, which accounts for 30% of the American workforce. But just like the other workers, self-employed people may want to get a home loan. Although these people have the advantage of working from home, making their own program and earning a good amount of money, it may feel too difficult for them to get a mortgage. So, is a self-employed home loan possible? Read and find out.

Why Getting a Mortgage Can Be Difficult When You’re Self-Employed

Most people who take out a mortgage are employees with a stable job that gives the lender some sort of security in case the borrower doesn’t make regular payments.

So, given you may be a self-employed person, the lender is less likely to trust your ability to repay the amount that you borrowed. Basically, the lender needs to look at how stable your business is, as well as the income – this is a lengthy process, and a more difficult one too. That being said, a lender will look at the financial strength of your business, as well as its location and the demand for that particular business in the first place. They need to see whether your business is able to support a mortgage or not.

It’s also quite challenging to check your income and determine how trustworthy you are. As a self-employed person, you probably have multiple sources of income, and they may fluctuate. Because of this, there’s a need for more documentation, which is often an obstacle. This is way harder compared to the documentation needed for a regular worker with a paycheck. Just like a Realtor and board member of the National Association for the Self-Employed, Scott Scribner, declared, “A W-2 employee usually sees consistent wages from year to year”.

A good amount of the income of a self-employed person may also become business expense – and this instantly lowers the amount of mortgage they can get. This causes a self-employed person to have a very small taxable income and thus not qualify for the needed amount of mortgage. According to Ryan Kelley, founder of the Home Loan Expert mortgage origination team, “Self-employed borrowers look to minimize their bottom line by taking advantage of tax deductions, which they should. However, having a lower bottom line puts them at a disadvantage when factoring in their debt-to-income [ratio].”

All that being said, your lender needs to make sure that you will gain enough money to be able to make payments on your mortgage while dealing with your other responsibilities. This is why they will look at your debt-to-income ratio, also known as DTI. In general, they will want a DTI of 43% or even lower. So, if you do not have the right amount of income to deal with your payments, the lender will choose not to offer you a mortgage.

Common Misconceptions about Mortgages for Self-Employed Borrowers

While getting a home loan is very difficult, there are still some common misconceptions that people have.

You’ll Pay a Higher Interest Rate

Because they are not regular workers, self-employed people are often expected to have to pay much higher interest rates. However, this is simply a big misconception. People who are self-employed can still get a mortgage and have the same interest rate as a normal borrower.

Meanwhile, if a traditional lender doesn’t want to give you a mortgage, you still have other ways to obtain one, respectively through a private lending company or a nontraditional lender. These are cases when the interest rate can be, indeed, higher, and the fees may be increased too. With traditional lenders, though, there’s no need to worry.

You Need a Cosigner

Many people think that they would need a cosigner to apply for a mortgage as a self-employed borrower. That’s due to the lack of trust a lender may have. But this is not actually true. You can be approved for a mortgage even with just your own income and no cosigner. As long as you are able to prove that you have a stable income and enough to support the mortgage, you don’t need a cosigner.

But that doesn’t mean a cosigner won’t be useful for a self-employed borrower. You never know when the situation will ask for it.

Why Is It Important to Always Report Income

It’s very important to report income simply because having a regular income will make you more trustworthy. If you are constantly earning money, you will look less risky to the lender and will have more chances to get your mortgage. So, whenever you can, you should report your income to make it easier for the lender to analyze your situation.

What Lenders Are Looking for in a Self-Employed Borrower

As already established, before you’re able to get a self-employed home loan, lenders need to look at your situation and see if you’re trustworthy and qualify. Apparently, lenders will look at three things when approving a mortgage. They look at the collateral, the capacity to repay and your credit reputation.

However, there are a number of things that lenders want to see from borrowers.

Consistent Income

You need to have a consistent income if you want the lender to approve your request. Consistent income means that the cash you receive should be quite steady and with no fluctuation if possible. If there is fluctuation, it needs to be in a very small number. This is important because it helps lenders determine how much you receive, and see the chances of you being able to deal with mortgage payments.

Stable Work

If you’re someone who just opened a business, then it may be harder for you to qualify for a mortgage. This is why you need to have some time being self-employed and have proof that your job is a stable one. Otherwise, the lender can’t be sure if your income is steady and if it will stay consistent over time. There is a chance to get a loan if you’re newly self-employed, but only if you have one year of self-employment tax returns and W-2s from someone working in the same field.

Savings

Lenders will also appreciate it if you make savings – for example, you can prove you have a cash reserve account. This will give them some peace of mind since they know you have some cash to make monthly payments.

A Good Credit Score

You might have had debt before, and if that’s the case, you should have a credit score. If you want the lender to grant you the mortgage, you need to have a good credit score, or else they will not consider it. Therefore, things such as collections, bankruptcies, foreclosures or anything of the sort will only make you look riskier and will lower your score. Work on your credit score to make sure it’s as high as possible and you should encounter no issues.

A Big Down Payment

Making a big down payment is enough to give some lenders more assurance. Basically, you will have the same requirements for a down payment as someone with a normal job – at least as long as you have good credit. So, the down payment shouldn’t be that big. But if you don’t have a strong financial profile, then you may have to make a larger down payment if you want the lender to trust you.

Why You Should Make a Down Payment on Your Mortgage

Making a down payment on your mortgage comes with various benefits. It can basically help protect you in case you need to move and there has been a drop in the housing market. Also, the down payment can increase the size of the house you will be able to buy while giving you a home in a much better location. A significant down payment will just make you more likely to get the mortgage that you need.

How Much Should You Put Down?

Usually, it’s ideal to put down about 10%-20% of your home costs that you’ve gathered before buying the house. It is a traditional requirement because it helps protect the lender, as it shows just how responsible you are.

How to Get a Personal Loan for a Down Payment

There are many lenders that can offer you a personal loan for your down payment on a house. To do this, you first have to submit an application online. You may be contacted in case there is more evidence required from you. Then, you will receive an offer to tell you that your information was verified, after which you’ll get a promissory note to sign. If you do this, you’ll be offered the loan after 2-3 working days, after which you can set up a paying method online such as autopay. Obtaining a personal loan is very easy this way.

Conclusion

A self-employed home loan can be obtained as long as you can prove that you are able to make constant payments thanks to a stable job and income. Making income reports all the time will help your situation a lot, and so, you’ll be able to buy a house. Don’t forget to check out Stilt if you still have curiosities on the matter.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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