How to Get a Mortgage When You’re Self-Employed

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Author: Adam Taylor

Millions of Americans earn a living as self-employed business owners, freelancers, and independent contractors. There’s great satisfaction — and good money to be made — in being your own boss. However, there’s one challenge you might not expect when you’re self-employed: It’s harder to buy a home.

How to Buy a Home: The Basics

If you’re a first-time homebuyer, you likely have a lot of questions about buying a house. These are the basics every first-time buyer needs to know.

• The homebuying process starts long before you hire a real estate agent. Start by checking your credit report and assessing what you can afford. Only then are you ready to start searching for homes.
• Be sure to include the full costs of buying a home in your budget. This includes down payment, closing costs, PMI, and property taxes.
• Get preapproved before you’re ready to make an offer. Unlike pre-qualification, loan preapproval definitively states that you can get a home loan.
• Buyers have a variety of mortgage options. Understand the difference between fixed-rate and adjustable-rate mortgages and conventional, FHA, USDA, and other loan types.

Challenges for Self-Employed Homebuyers

The basic homebuying process is the same whether you work for a Fortune 500 company or own a small business. However, self-employed buyers have to jump through extra hoops.

• Getting a mortgage when you’re self-employed requires extensive documentation, including two years of personal and business tax returns, bank statements, financial statements, and copies of business licenses and corporate filings.
• Mortgage lenders want to see stable income and a low debt-to-income ratio. Self-employed borrowers run into challenges when they write off a lot of expenses; thus, reducing their net income or having to turn to personal loans for business debts.
• It’s important for self-employed borrowers to separate business and personal assets before applying for a mortgage. Rather than operating as a partnership or sole proprietorship, form an LLC in your state, establish business bank accounts, and apply for the necessary business licenses and permits.

How to Get Approved for a Mortgage

What can self-employed buyers do to get into their dream homes? Here’s how to increase your chances of mortgage approval.

• Start by getting your credit score in top shape. A 760 credit score gives homebuyers access to the best lending options. Pay down debts and avoid overdue bills to improve your score.
• Offering at least 20% down also improves your creditworthiness. Saving a large down payment takes time, but borrowers can speed up the process with down payment assistance programs and 401(k) loans.
• Self-employed borrowers may have more luck at a local credit union as opposed to big banks. Credit unions tend to have more flexibility in decision-making along with better customer service and lower fees.

Self-employed buyers face barriers when buying a home, including higher lending standards and expanded documentation requirements. However, that shouldn’t keep you from becoming a homeowner. Take the right steps now to prepare for a smooth loan approval process. With your finances in order, you’ll be ready to buy your dream home at the rate you deserve.

Are you ready to buy a home? Contact Mary Ann Fitzharris, your local real estate connection, to learn how you can get the best deal possible on your first home.

Our guest contributor, Adam Taylor, and his girlfriend, Sarah Noel, both left corporate jobs to work as freelancers, chasing balance between the work they loved and the life they wanted. Now, with TaylorandNoel.com, they’re sharing their best practices with other freelancers, in hopes they can do the same..