Owning your own business has many benefits, not the least of which is the ability to write off business expenses to keep your tax liability low. The downside to this happens when you go to get a mortgage. As a self-employed borrower you must document your income with your tax returns. If your reported net income is too low, you may not qualify for the mortgage you want, even though your cash flow is strong. So how do you qualify for a mortgage for the self-employed homebuyer? Let’s take a deeper look.
Mortgage Qualifying in General
Qualifying for a mortgage for the self-employed homebuyer is at its core no different than what a W2 wage earner must do. Qualifying has three main components: income, assets, and credit. Credit requirements don’t differ at all, and documenting it just requires a credit report.
Assets are usually the same as well, except the self-employed home buyer usually has more bank accounts—some in their personal name, and some in the company name. It’s important that we document the primary business account where your revenue shows, plus your personal bank statements showing your normal household expenses.
Income is where the mortgage for the self-employed home buyer is harder. Your income tax returns may not support the mortgage you want.
Lenders recognize this. So, they instead will allow us to use your business bank statements to document your business’ gross income. Then, they will use a standard ratio for expenses and impute a net business income. This income is then used to qualify you for your loan.
You’ll need to take a few extra steps, too. You’ll have to document that you’ve been in business for at least one full year and that you are still actively engaged in the business. What does this mean? A business license or ficticious business name statement usually confirm how long you’ve been in business. If these are not available, you may need a letter from your CPA confirming how long they have been preparing your business tax returns. A current web site or business phone number confirm that your business is still on ongoing concern.
Is a Mortgage for the Self-Employed Home Buyer a Stated Income Loan Then?
No! It’s important to point out that leading up to the financial crisis there were many stated income loans that were obviously fraudulent. Lenders look closely at that now. It’s very hard to get a mortgage on your personal residence using only stated income.
Bank statement loans are an accepted (alternative) way to document your income. These loans are not, however, purchased by Fannie Mae or Freddie Mac (The Agencies.) They are instead sold to Wall Street hedge funds. Interest rates and fees tend to be a little higher than conforming loans. But if you can’t qualify for a conforming loan, a bank statement loan just may do the trick.
Is there Any Other Mortgage for the Self-Employed?
Yes! There are many ways we can document additional income.
Deeper Dive: Can You Get a Mortgage Without a Job?
If you have an investment portfolio invested in stocks mutual funds, or savings, we can impute income from that to help you qualify.
If you receive spousal or child support you don’t have to tell us about it, but you can, and in most cases we can use it.
If you rent out a room in your home, we may be able to use that.
If you want to get really creative, Amy Fontinelle, writing for Investopedia, has some excellent pointers as well, including getting a co-signer, optimizing your debt-to-income ratio, and more.
Bottom Line: You Can Get a Mortgage for the Self-Employed
First, work with a mortgage advisor who has experience and understands alternative programs. If you are self-employed it’s always better to work with a mortgage broker, rather than with a direct lender, as the broker will have many lenders to shop and many loan programs to help you choose from.
When you talk to your mortgage advisor, be sure to tell them everything you can think of. Your mortgage broker is on your side and knows how to structure your loan application in the way that is most likely to succeed. A mortgage for the self-employed can be a little tricky, but if they know everything about your situation, they can almost always make it work.
I am based in Silicon Valley and write loans anywhere in California. DRE 00889527 / NMLS 344375
Casey Fleming, Mortgage Advisor and Author of The Loan Guide (2014) and Buying and Financing Your New Home (2023)
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About Casey Fleming: Casey Fleming is a veteran mortgage advisor (NMLS 344375) and Author of The Loan Guide and Buying and Financing Your New Home writes extensively about real estate finance, the real estate market, and the relationship between economics and finance. He advises clients throughout California, and is based in the heart of Silicon Valley. He writes articles regularly for several online publications, is a subject-matter expert for two prominent finance-related sites, and is regularly quoted in articles for many other publications.
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Resources used for this article:
How to Get a Mortgage When Self-Employed (Investopedia)
How to Get a Mortgage if You’re Self-Employed (WSJ)