A Mortgage Guide for the Self-Employed

Being self-employed or an independent contractor doesn’t mean you can’t qualify for a mortgage, but it does present a few challenges. First, lenders may require paying higher interest rates as they need to compensate for the lack of verifiable income. Second, lenders may require additional documentation and paperwork, such as:

  • Two years of personal tax returns
  • Two years of business tax returns including schedules K-1, 1120, 1120S
  • Business license
  • Year-to-date profit and loss statement
  • Balance sheet
  • Signed CPA letter stating you are still in business 

ALTERNATIVE OPTIONS

For those who cannot provide all of this information, there may be a few additional options available:  

Stated Income/Stated Asset Mortgage (SISA) A SISA mortgage requires that the borrower disclose their income, but the bank will not verify the amount. Also known as low-documentation loans, the bank only seeks to verify the sources of such income. Borrowers may have to provide a list of recent clients and any other sources of cash flow, such as income-producing investments. The bank may also require borrowers to submit an IRS Form 4506 or 8821. A Form 4506 is used to request a copy of a borrower’s tax return directly from the IRS, preventing falsified returns. A Form 8821 authorizes the lender to go to any IRS office to examine taxpayer information.  

No Documentation Loan With a no documentation loan, the lender does not seek to verify the borrower’s income in any way. This is a good option for borrowers whose tax returns show a business loss or very low profit. Because this type of loan is much riskier for the lender, interest rates will be higher.  

BECOMING A MORE ATTRACTIVE CANDIDATE

Find a W-2 Co-Borrower or Co-Signer Getting a joint mortgage with a co-borrower who is a W-2 employee can help improve a borrower’s prospects of getting a mortgage. This provides assurance to the lender that there will be steady income to repay the debt. Borrowers can also have a parent or other relative co-sign on the mortgage, but this person must be willing and able to assume full responsibility for the loan upon default. 

Improve Out Your Credit Score
A higher credit score makes for a more attractive candidate and can help qualify for the loan and lower interest rates.  

Offer a Large Down Payment The bank will see a borrower as less of a risk if they provide more cash up front and have higher equity in the home.

Have Significant Cash Reserves Having plenty of money in an emergency fund shows that a borrower will be able to make monthly payments even if income decreases.  

Pay Off Consumer Debt Paying off credit cards or car loans increases cash flow and will allow a borrower to qualify for a higher loan amount. 

Provide Self-Employment History and Documentation Providing at least two years of self-employment history along with documentation such as previous years’ tax returns, profit and loss statements and balance sheets will make lenders more comfortable and increase a borrower’s chance in qualifying for a loan.

Minimize Deductions For self-employed individuals, taking deductions is a common way to reduce taxes, but this may actually hurt a borrower’s chances of qualifying for a loan. When approving a loan, lenders look at a borrower's net income, which should be as high as possible. While taking fewer deductions may mean paying a higher tax bill, it may also mean getting approved for a higher loan amount. 

DID YOU KNOW? The U.S. Bureau of Labor Statistics estimates that the number of self-employed workers will rise to 10.3 million by 2026.  

DID YOU KNOW? You may not have to show 24-months of self-employment history to get a mortgage. For instance, Fannie Mae says that you may qualify with 12 months of self-employment if you have previous experience in that field, and your income is at least as much as you earned in that field before becoming self-employed.  

Brought to you by Brittany + Christa

THE URSINI TEAM AT COMPASS  

We're not your typical real estate agents. As former city dwellers, we appreciate the qualities that make city lifestyle so unique, from the convenience of walking to your favorite restaurant or corner store to the vast and diverse cultural and entertainment activities. But we’ve also experienced the challenges and frustrations that are motivating you to seek change. During our transition from the city to the suburbs, we had the same thoughts, concerns and questions, prompting us to create a better way to navigate the suburban home search process for others.

LEARN MORE