Becoming a Self-Employed Homeowner: Ultimate Guide
Becoming a self-employed homeowner sounds like a dream, doesn’t it? You get to continue working for yourself, calling your own shots, and own your own home. Why should it stay simply a dream?
Living the self-employed life — whether you’re a freelancer or a business owner — can be a challenge. So is homeownership, but why let that stop you?
The good news is that you don’t have to do everything alone.
If you’re a nontraditional worker, or otherwise self-employed, and you want to become a homeowner, here’s everything you need to know about the process of getting a home.
Can You Get a Mortgage While Self Employed?
When you work for yourself, you need to learn a great many things about processes that might seem simple to everyone else. One such process is the one that leads you to becoming a homeowner.
To start with, yes. You can get a mortgage while self-employed.
Many of the documents and things you’ll need are similar to what someone who’s traditionally employed would need. You might have to provide some additional documentation or information proving that you’re ready and capable of taking on a mortgage loan — like proof of financial stability. But as long as you’ve got that, you’re well on your way.
If you’re buying your first home as a self-employed person, you’ll also want to consider a few things like:
Where you want to buy property — knowing this can help you figure out what you need to get started
Your income — you’ll need to have a clear picture of your financial situation before applying and getting a mortgage loan
Programs your state offers — this could include first-time buyer programs, down payment assistance programs, the types of home loans available in your area, etc.
In terms of programs, here’s an example of what you could be looking at in North Carolina:
NC Home Advantage Mortgage program: This program includes up to $15,000 in down payment assistance (or 5% of the finances amount). You’ll need to be a first-time buyer or an eligible military service member. You won't need to pay back this assistancee unless you sell or refinance your home within a certain period of time (usually 15 years).
Home loan types: Like most states, you could get several different types of mortgage loans. This includes a conventional loan, jumbo loan, FHA loan, VA loan, and USDA loan. For self-employed buyers, there’s also the nonqualifying mortgage loan (non-QM loan).
Is it Hard to Get a Mortgage Loan When Self-Employed?
How hard it is to get a mortgage depends on your circumstances.
For example, if you’ve only recently started working for yourself and don’t have a lot of financial or business records, you might have a harder time qualifying for a loan. But if you’ve been self-employed for several years and have consistent earnings (and documentation verifying those earnings), you’ll have a better chance of qualifying.
Being self-employed won’t stop you from buying a house. But you’ll need to consider your situation and goals honestly and carefully.
Ask yourself if you’re ready to buy a home. Emotionally, yes, but also financially. If the answer is yes, you’ll be in a better position to get started with the homebuying process.
Self-Employed Vs. Employed: Differences When Purchasing a Home
Okay, so you’ve decided to buy a home. But before you do, it’s important to understand two things:
Your self-employed status
Differences between self-employed and traditionally employed when buying a home
You’re probably self-employed if you:
Work for yourself and/or don’t have a typical 9-5 job
Don’t receive employee benefits from any specific company (besides your own)
Are a freelancer or contingent worker (these are self-employed individuals who work with different clients on multiple short- or long-term projects)
Own your own business (e.g., LLC, sole proprietorship, C-Corp)
Work as a contractor for another company but still determine your own hours, rates, and project duration
Find yourself dealing with profit-loss statements, taking your taxes out of your income, etc.
On the other hand, you’re probably a traditional employee if you:
Work for a specific company and/or receive company benefits (like retirement, vacation time, or sick leave)
Have more standard hours (like — but not limited to — a 9-5)
Receive W-2s or regular pay stubs
Don’t have to take taxes out of your own paycheck
Now, when purchasing a home as a traditionally employed person, you’ll need several documents. For example, you’ll need to provide proof of income — such as paystubs, recent tax returns, or W-2s. You’ll also generally need to have at least 2 years’ worth of steady employment at your current company.
Self-employed people — independent contractors, freelancers, or business owners — will still need to provide proof of steady income over at least 2 years. However, these documents might look a little different. For example, you might need to provide ongoing client contracts or business financial statements indicating ongoing revenues.
If you’re self-employed but don’t have at least 2 years’ worth of steady income doing what you’re doing, you could still qualify for a home loan. You might need to meet other lender criteria first though. You may also need to shop around for lenders to find one that’s willing to work with you.
Whether you’re self-employed or not, you’ll also typically need to meet other basic requirements, such as:
Minimum credit score
Maximum debt-to-income ratio (DTI)
Minimum down payment
Try not to worry too much about the finer points of being self-employed vs. traditionally employed right now. What matters is getting a baseline idea of what you’ll need to qualify for a mortgage. From there, you can start working out the kinks.
What You Need to Qualify for a Mortgage When Self-Employed
Have you ever heard of the Four C’s of qualifying for a home loan?
To put it simply, these are the most basic requirements you’ll need to meet before a mortgage lender will give you a loan. Whether you’re self-employed or not, here’s the gist.
Capacity to pay back the loan
The first “C” refers to your ability to repay the loan in its entirety. A lender will evaluate your income based on your:
Income sources
Income type
How long you’ve been earning that income
Future potential earnings (and stability)
A lender will also review your other debts or liabilities, such as other loans and credit card payments. As long as you’re handling your finances okay, you’re on the right track.
Capital
The aspect of capital…
Sounds like a finance-related buff to your skills, doesn’t it? And honestly, in many ways, it is a buff in that the more capital you have the better.
When you apply for a mortgage, most home lenders will be more willing to lend you money if you have other assets — like savings or investments — to your name. And if your investments are easily liquidated (converted into cash), that’s even better since it gives them more faith that you’ll pay back what you owe.
Other types of assets count as well. For example, if you receive a monetary gift — like a down payment assistance grant or loan — that could count as well. Your lender will want to know where that money is coming from though.
Collateral
The third “C” refers to the home you’re purchasing.
When you buy a home, your lender will typically require a property appraisal. This appraisal will determine the fair market value of the house. It will also determine whether or not the seller is asking for too much money.
Say, for example, you want to buy a home for $400,000. If the appraised value is only $300,000, the lender might only be willing to offer you a loan for that amount. This means you’ll need to either look for a different lender or home… or you’ll need to pay the difference — $100,000 — yourself.
Now, say the property is worth more than what the seller is asking. Maybe they’re asking for $400,000 but the property’s appraised value is $450,000. You might have better odds of getting approved for a home loan.
Credit
The final “C” refers to your credit — that is, your creditworthiness as a whole.
Your credit score, along with your credit history, breaks down your behavior when it comes to handling your financial obligations. It shows a lender your ability to pay back what you owe. It also gives them a better idea of how risky you might be as a borrower.
Think of your credit like taking a lifelong test (but one where you can always bring your grades back up if need be).
The better you stay on top of your debts, the more positive marks there’ll be on your credit report. At the same time, the higher your credit score will be.
On the other hand, the more you miss payments or the higher your debt load is, the more negative marks you could receive. This could also result in a lower credit score… and make it harder to get a large loan.
Want to check out your credit sitch? You can get a free annual copy of your credit reports at Annualcreditreport.com.
Self-Employed Homeowner Requirements For You
With these Four C’s in mind, let’s break down what you’ll need to qualify for a mortgage as a self-employed person. Ready? Here goes!
Self-Employed Status
Your self-employed status will impact the mortgage lending process. When you apply for either a home loan or preapproval, you’ll typically need to indicate whether you’re self-employed or not.
The IRS has a simple way to determine if you’re considered self-employed. While this is primarily for tax purposes, you can also use it when applying for financing. Here’s the breakdown:
You’re either a sole proprietor or an independent contractor in your business/line of work
You're part of a partnership that does a business or a trade
You essentially work for yourself as a gig worker or business owner
Generally speaking, you’re self-employed if you work for yourself and/or have clients, charge for your products or services, or own your own business.
You may also be self-employed if you work for a company that gives you a 1099 tax form, or if your income is listed on a Schedule C form. In fact, it’s quite common for freelancers and independent contractors to receive a 1099 form from their clients. This form simply lists any income that particular client has paid in a given year.
For example, say you’ve been working with a client from January 2023 onwards. At the start of the following year, you could receive a 1099 from that client. Even if you quit working with them during 2023, you’ll still get this form for tax purposes.
Duration of Work
When you’re self-employed, the way you earn money — your earning potential — is pretty flexible. It might even be virtually unlimited.
This can be a good thing in some ways. After all, you get to set your own rules. Your own limits.
But some lenders might be wary of working with you if they don’t view your work as being stable. Major changes in your work, earnings, or client contracts could make it harder to qualify for a home loan.
If these changes do occur, you might need more time before applying for a loan. At the very least, you’ll probably need to clarify the reason behind these changes — and show that they won’t negatively affect your ability to pay back a home loan.
Your lender is going to want to know two things about your work here:
How long have you been doing it?
How likely is it to continue?
You might be able to get a mortgage if you’re self-employed for less than 1 year. However, you’ll generally need to have at least 2 years of steady income. If you own a business, for example, you’ll need to have been in business for 2+ years before applying for a home loan (in most cases). The same goes for independent contractors and other self-employed individuals.
The good news is that there are several ways to build stability in your line of work. For example, you can set up long-term or ongoing contracts with clients. Or you can work on retainer. You might even be able to get your current clients to write letters showing their plans to continue working with you in the future (though this might not always be necessary).
If you own a business, showing your business license can also help. Showing profit-loss statements with positive or consistent revenue trends can help as well.
Proof of Income
A mortgage lender is going to want to know if you make enough money to easily cover your monthly mortgage payments. And to be honest, this is something you should be confident about as well.
If you’re self-employed, you can provide proof of income through recent federal and state tax returns. You can use business tax returns if you own a company. Otherwise, you can typically use personal tax returns.
Depending on how you’ve set up your business, you might also need to provide certain “schedules.” In a business partnership, for example, you can declare your profits and losses via Form 1065 (“U.S. Return of Partnership Income”). Each partner within that partnership will also need to fill out and submit a Schedule K-1 form.
Some lenders may request an official profit-loss statement. While you can do this yourself, it might be easier to have a Certified Public Accountant (CPA) help you with these forms. A CPA can also help you provide sufficient proof of income to the lender.
You might also need to provide a balance sheet. This is a document that lists your business’s liabilities and assets. It may also include your equity in that business.
Last but not least, it helps if you can show consistent growth in your business and/or earnings. Not only can this give you more financial stability, but it can help incur trust with a potential lender.
If you don’t already have one, consider making a simple business plan that indicates your income potential. Even if a lender doesn’t request this document, it can give you a clearer idea of how much you could earn in the future.
Credit Score
Your credit score is essentially a way to quantify your credit behavior. You can view it like a grade that shows your ability to handle your finances and any loans, credit cards, or lines of credit you take on.
Here’s what your FICO (the most commonly used scoring model) credit score consists of:
Payment history (35%): This shows how likely you are to make your payments on time. Say, for example, you have an auto loan with regular monthly payments. If you make every payment on time, this will show up on your credit report as a positive mark — no late or missed payments equals positive on-time payment history. Over time, this will improve your credit score.
Amounts owed or credit utilization (30%): How much you owe also influences your credit score. Say your total available credit is $10,000 but you’re using $8,000 of it. This could indicate that you’re more likely to default on future loan payments than if you were to use less of your credit.
Credit history length (15%): This is essentially the amount of time you’ve had credit, on average. Check your current credit cards or loans to see when they were first established or opened. This can give you an idea of your credit history length. This has a lower impact on your credit score.
New credit (10%): If you’ve applied for or opened new lines of credit recently (e.g., loans or credit cards), this could affect your credit score, too. Opening one or two might not matter much in the grand scheme of things. But applying for multiple accounts at once could have a great impact.
Credit mix (10%): Your credit mix is essentially the different types of credit you have — like personal loans, mortgage loans, student loans, and credit cards. You don’t need to have one of each type, but having a mix in good standing can be a good thing.
Negative marks (N/A %): Negative marks are another aspect of your credit score. This includes things like bankruptcy and foreclosure, both of which can stay on your credit report for anywhere from 7 to 10 years. Having negative marks can make it harder to qualify for a home loan.
Errors (N/A %): If you’ve got errors on your credit report, such as incorrectly reported late payments or duplicate accounts, these could affect your credit score. Review your credit reports regularly for these errors. If you find any, dispute them with the reporting bureau (like Experian or TransUnion) to remove them and boost your credit score.
FICO is the most commonly used credit scoring system used by lenders. But it’s not the only one. Some lenders will instead use VantageScore.
With VantageScore, your credit score is weighted a little differently. However, it still consists of roughly the same things — like payment history and credit utilization.
With both scoring models, your credit score will be between 300 and 850. Here’s how this might look with FICO:
300 - 580 is Poor
580 - 669 is Fair
670 - 739 is Good
740 - 799 is Very Good
800+ is Exceptional
And with VantageScore:
300 - 600 is Subprime
601 - 660 is Near prime
661 - 780 is Prime
781+ is Superprime
The better your credit score is, the better your approval odds when getting a mortgage. Many lenders will require a credit score of around 620+. However, you might be able to get an FHA loan with a credit score as low as 500 (with a 10% down payment).
It’s also possible to have no credit. This isn’t necessarily a bad thing, but it might make lenders view you as a “high-risk” borrower.
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio — sometimes called DTI or DTI ratio — is another important factor that lenders consider when deciding whether to offer you a mortgage loan.
Your DTI is the percentage of how much of your gross income goes toward your monthly debts. These debts can include loans and credit card payments.
The more money that is siphoned away to pay these debts, the higher your DTI will be. Most home lenders will only work with you if your DTI is:
43% or less (including your future mortgage and/or based on creditworthiness)
36% or less (excluding your future mortgage and/or based on creditworthiness)
If your DTI is too high, you might want to take some time to adjust it. Otherwise, a lender might view you as too risky and not approve the loan. You can lower your DTI by increasing your income, reducing your debts, or both.
Want to calculate your debt-to-income ratio? Here’s a simple formula:
Add all monthly debt payments
Divide them by gross monthly income
The resulting percentage is your DTI
Here are a couple of examples of DTI:
Down Payment
You’ll generally need to have a down payment when getting a home loan. The down payment requirements depend on the home loan type, however.
For example:
Conventional loans typically require a minimum down payment of 3% to 5% of the home purchase price. You’ll need a 20% down payment to avoid private mortgage insurance (PMI). PMI is an additional upfront and/or monthly expense that gets tacked onto your monthly payment. It benefits the lender much more than it benefits you.
FHA loans typically require a minimum down payment of 3.5% to 10%. If your credit score is 580+, you might be able to put down 3.5%. If your credit score is 500 to 579, you might need a 10% down payment or higher.
USDA loans and VA loans usually don’t have a minimum down payment requirement. Speak with your lender about their specific requirements.
Jumbo loans are larger loans used for more expensive properties. They may have higher down payment requirements (often 10% to 20% or higher).
The more money you have in savings or investments, the better your approval odds for a home loan will be. Even if you don’t use all of that money for a down payment — and you probably want to keep a financial cushion just in case — just having it can improve your chances of getting financing.
Required Documents for a Self-Employed Mortgage Loan
At this point, you already know some of the basic required (or recommended) docs for your mortgage loan. But let’s outline them here for ease of reference:
Any business licenses you may have: Some lenders may require this, but not always. Either way, it can be helpful if you do have one.
Proof of income: This can include bank statements, tax returns, 1099s, balance sheets, and profit-loss statements. It can also include proof of any additional income you earn elsewhere (such as through side gigs). You may also be asked to provide purchase orders verifying your earnings.
Credit report: Your lender will most likely require you to give them access your credit history and report. This is generally done when you complete the preapproval or formal application process.
Identity: From your Social Security Number to other forms of identification, like a passport, driver’s license, or green card, there are many ways to prove your identity. You’ll generally need at least one or two forms of identification — ideally with a photo and your current contact information.
History of renting: In some cases, a lender may ask to see your rental history. They can use this to verify your payment history and to see whether you’ve had any problems with things like eviction in the past.
Closing documentation: When you reach the closing process of buying a home, you’ll need several additional documents. This may include things like homeowner’s insurance and the closing disclosure.
Gift letters: If you’ve received gift money from someone, such as for a down payment, you might need them to write a physical letter indicating that the money itself was a gift and not a loan. This can show your lender that you’re not borrowing more money or increasing your financial obligations.
Business details/information: In some cases, a lender may request more information about your business or line of work. This can include a list of your current clients or a letter from the Certified Public Accountant who helps you with your business finances. If you’re part of a professional company or organization that can vouch for you, that might also help.
Business insurance policies: If applicable, you might also need to show any insurance policies you have — such as employer’s liability insurance or workers’ compensation. There are other types of business insurance as well, so be prepared to show any that you have. Having business insurance can help your approval odds since it can provide additional financial protection to your business in case something happens. Insurance can also protect against financial lost due to equipment malfunctions or lawsuits.
14 Steps to Getting a Mortgage While Self-Employed
OK, so you’re self-employed and you’re getting a mortgage loan. That’s great!
While everyone takes steps to achieve their goals in their own way, here’s what you’ll typically need to do. Oh, and of course, as you continue to innovate and improve your line of work, you might find yourself prioritizing certain steps over others. That’s okay, too.
Establish Consistent Cash Flow
Cash flow — not the most exciting word, right?
If you’ve been self-employed for a while, you’re probably already very familiar with cash flow. But just in case you’re not — and because metaphors are fun! — let’s create a fun metaphor to describe it.
Imagine cash flow as a large lake of water. Now, imagine that there’s a single river that brings water into this lake and another river that takes water out.
The water is cash. The lake is your business. Any water going into the lake is considered “positive” cash flow. Any water leaving is considered “negative” cash flow.
Having consistent cash flow, especially if it’s stable or positive, is a good sign that what you’re currently doing is working. Lenders will want to see this consistency since it shows them that your business is profitable. A business that has a larger river of water leaving the lake is losing money. This doesn’t exactly show stability.
When applying for a mortgage loan, you’ll need to show consistent and positive cash flow. You can do this in several ways, such as:
Finding methods that increase your earnings
Create multiple streams, or rivers, of income that don’t also produce large rivers that lose money (aka paying high overhead charges)
Just remember that if you create a secondary business or side hustle, you’ll still need to show stability with it. Even if surpasses your original income, lenders might not consider it as seriously if it’s only been around for a few months.
Extra income streams never hurt, though!
Save Up for a Larger Down Payment
You’ve definitely heard this before… but do make sure you’re saving up for a down payment. Just enough so you can get the home you want. But not so much that you’re unable to enjoy a nice quality of life (because all of your money’s going toward your savings).
A down payment can serve many purposes. It can reduce your overall loan amount. It can show a potential lender that you’re a serious buyer. It can even get you a lower interest rate (potentially).
Some mortgage loans — like conventional loans — also require you to get private mortgage insurance (PMI) if you don’t have at least 20% down. This is just an extra charge that protects the lender… but not you. That’s extra money in the lender’s pocket — all because your down payment was “too small.”
Not that a smaller down payment is always a bad thing. If you need some extra money for other things, you might not want to spend all of it on your future home. And if you do get PMI, you can always refinance your loan later to get rid of it.
When saving up for a down payment, think about where you’re putting your money. A high-yield savings account (HYSA) could be a good option as it can help you earn more interest over time. If you have more time before you want to buy a home, a certificate of deposit (CD) could be worth considering as well.
Staying disciplined and tucking away a good amount of money each month can help, too. Just don’t overextend your budget by putting too much in.
Last (but not least)... Try not to touch your savings. Keep it as separate from your other accounts as possible.
Why does this matter? Well, because:
A separate account makes it easier for a lender to see exactly what you’ve got.
It’s easier to keep and show records of your deposits over time — good for the lender and your future homebuying self.
You won’t be as tempted to spend if you don’t have immediate access to the account!
See if you can set a minimum amount to deposit each month. If you can put in a little extra, that’s totally fine. But try not to drop below your own minimum.
Get Some Cash Reserves Together
Your first cash reserve: Your down payment.
But you’re probably going to need some extra money for other things — just in case.
Try to get some cash reserves together for these things:
Closing costs: These can include government taxes, appraisal fees, title insurance, homeowners insurance, and property taxes. They’re often between 2% and 6% of the home purchase value.
Moving costs: Once you’ve gotten the keys, you’re still going to need to move homes (unless you’re living the minimalist lifestyle — and honestly, good for you if you are!) That means you’re probably going to need money for things like a moving truck, professional or amateur movers (got friends to help? Pay them in food at the very least!), packaging supplies… You get it.
Furniture and decor: If you exhaust all of your extra cash on buying a home, you might not have any left for furniture and decor. But this is an exciting part of homeownership, so leave some cash for that.
Necessary repairs: The seller might be willing to pay for certain repairs or maintenance costs, but you could still have to deal with some yourself. Check the real estate contract to see what’s covered and what’s not. Save some money for your part — and for any unexpected costs.
Hidden or other costs: Save some money for miscellaneous or surprises, too! Extra furniture. Your first month’s mortgage payment (especially if you also have to cover rent that much). A broken gate latch or fence post. Whatever you can do, it won’t hurt to have the extra money.
Now, the exact amount you should save is subjective… but here’s a bit of advice (most definitely not gained from a popular homebuying show on TV):
When it comes to buying a home and paying for all of these costs, expect to go over your budget. Be prepared for this and you won’t experience as much of a financial strain.
Calculate Your Self-Employed Income for Mortgage Loans
Mortgage lenders usually use your gross income to determine whether you qualify for a loan.
Gross income — earnings before taxes and deductions
Net income — earnings after taxes and deductions
Your gross income will be a larger number than your net income — nothing’s been taken out yet, after all. The good news is that this means you could qualify for a larger loan. The bad news is that you might overshoot your budget if you’re looking at your gross income and not your actual take-home pay.
Now, some lenders view self-employed borrowers as “higher” risk. Because of this, they might use your net income — or net business income — anyway. This might make it harder to qualify for a larger loan. But it can also be more indicative of how much you can actually afford.
It’s up to you which income you look at — net or gross. But personally, we’d say net income is the way to go as it’s less risk to both you and the lender (and they do matter just a little since they have the final say).
Oh, and one other thing.
Many freelancers and other self-employed people will try to take advantage of every tax liability possible. This is good in that it can lower your overall taxable income. The downside is that any lender that sees your tax returns will see that you earn less money.
Calculate Your Preferred Mortgage Payment
Of course, you should definitely calculate your mortgage payment. Not just how much can afford but how much you want to.
Your monthly mortgage payment will generally consist of:
Loan amount (or principal amount): This is the amount you actually borrow excluding fees.
Interest amount: This is the cost of borrowing money and increases your monthly payment. You’ll usually spend more money on interest new the start of your loan and less on paying down the principal. This is will reverse as you get further into your loan term.
Escrow fees: You may have to pay other fees, like homeowners insurance and property taxes. These will increase your monthly payment.
Now, when you apply for a home loan, you’ll likely receive a loan estimate. This document breaks down important information like:
Loan’s interest rate
Total estimated closing costs
Monthly mortgage payment
The loan estimate should be very easy to understand. After all, it’s designed to help simplify the more complex aspects of having a mortgage.
You can use the loan estimate to determine whether the loan you’re applying for — and potentially getting — fits into your budget. If it doesn’t, you may want to tweak a few things and try again.
When in doubt, use an online mortgage calculator and play with some numbers until you find your “preferred” mortgage payment amount.
Review and Improve Your Credit Score
Credit plays a huge role in getting a home loan — self-employed or not.
Check your credit score and see if it’s good enough to qualify for a loan. Check your credit report to see which areas you need to improve upon. Take the time you need to bring your score up to where you want it to be.
Lower Your Debt-to-Income Ratio (DTI)
Lenders usually prefer working with borrowers with a reasonably low DTI. If yours is pretty high, find ways to lower it.
You can do this by:
Paying off credit cards or existing loans
Increasing your monthly income
We know — it’s a crazy concept, right? But effective.
Separate Your Personal and Business Expenses
If you’re working for yourself, you really should separate your personal and business expenses. Even if you’re not applying for a mortgage.
Why?
Because keeping things separate — and clearly defined — makes understanding your financial situation a lot clearer. And what do we want lenders to see? Clean records and easy-to-understand finances.
Plus, this is good for you since it makes things easier when filing your taxes. It also lowers the risk of getting audited later on… or even sued.
Set up a separate bank account for your business. Any earnings should go directly into this account. Any business expenses should also come from this account.
But how do you pay for your everyday bills? By “paying yourself” via monthly or biweekly transfers to your personal account.
You might want to have two entirely separate banks for your personal and business accounts. But you can also have one bank with different accounts in your name. Just try to be consistent about how you manage your money.
Get Your Documents in Order
Whatever stage you’re at in the homebuying process, get your documents ready as soon as you have them. This will just make your life easier.
Commonly required documents include:
Income documents
Profit-loss statements
Balance statements or balance sheets
Employment verification documents
Client contracts
Loan applications
Preapproval letters
Business insurance
Other business documents (like permits)
Federal tax returns
Bank statements for the past 6-12 months (more doesn’t hurt)
Make copies of everything, too, if you plan to apply for a loan in person.
Establish a Self-Employment Track Record
One way to help with the “proof of income” side of things is to keep a record of your profits and expenses. If you’re using a site like Squarespace, you can keep track of your sales on the platform. Otherwise, you might need to use separate software to keep track of this info.
A simple method we use? Google Sheets. We keep records of every single project we do there, including deadlines, rates, client names, and so on.
Depending on your business type and where you’re at professionally, you might want a more advanced software or accounting system. Heck, you might even have a virtual assistant keeping track of this for you.
Do whatever works for you. It’ll all help in showing a lender how profitable and stable your business is.
Prepare to Explain Your Business or Income Sources
This might feel a bit redundant or unnecessary, but it doesn’t hurt to have a clear explanation of your business and income sources.
Maybe you’ve got an elevator pitch. Or maybe you earn money in five different ways.
Whatever the case, find a clear, easy way to explain it to a future lender — just in case they ask. It’ll help them evaluate your situation and make a decision that favors you.
And of course, you can use business docs to help explain this. You can even get a certified public accountant (CPA) to write a letter clarifying your business sitch.
Find a Co-Signer or Co-Borrower
A home loan is a major responsibility. So, you might not be able to find someone willing to sign on the dotted line with you and take equal responsibility for the loan.
But… if you’ve got a partner — business partner, romantic partner, you get the gist — you might benefit from applying for the loan together with them. You’ll want to choose someone you can rely on. Someone you can really trust.
And you’ll want to make sure you have a good relationship with them — through thick and thin. Someone who, if things ever go south in the future, you’ll both still be amicable enough to make major financial decisions — like selling your home and splitting the proceeds — without stress.
Found one already? Good. Then, you can move on.
And if you don’t want a coborrower, that’s fine, too. Not everyone has to buy property together, after all.
Shop Around for Lenders
Every lender is different. Obviously.
Some lenders are more willing to work with self-employed individuals than others. Some will offer better terms or rates. Others will have less strict eligibility criteria.
Shop around for mortgage lenders and make a short list of the ones that best match your needs. You can narrow the list down by:
Doing the prequalification or preapproval process with them and comparing loan offers
Comparing typical interest rates or APRs
Checking what other people are saying about them (their reputation)
Seeing what loan types they have
Talking with a rep and getting a feel for how their process works… and whether you like them
Now, you don’t have to necessarily establish rapport with any particular lender. You can definitely view this entire homebuying process as a business transaction and nothing more.
Or… you can take some time to build a good relationship with them. This might be easier with smaller or more local lenders, or with a bank you’re already a customer with. It won’t necessarily get you a loan, but it won’t hurt either.
Review Eligibility Requirements
This might seem obvious, but you should check the eligibility requirements before applying for a loan. The sooner you do this, the better since it’ll give you more time to find a different lender or loan program… or improve your situation as needed.
Apply
Before you formally apply, remember that you can always do a pre-qualification application. This will give you a rough estimate of how much you can borrow. It will also give you a better idea of whether a specific lender is likely to approve your actual application.
You can also try for preapproval. This will impact your credit score, but will give you a clearer picture of your loan options. The results from preapproval typically only last a certain amount of time — maybe a couple of months — so do this a little closer to the end.
Once you’re ready, apply for financing. This will involve a credit check. And credit checks affect your credit. But if you apply with multiple lenders within 45 days, your score will only be impacted as though you’d applied once.
Remember, applying for a loan doesn’t mean you’re going to get it. And even if you’re approved, you might still want to walk away — depending on the rates and terms and all.
That’s why you might want to apply with a couple of your top lenders. Then, you can compare your options and choose the right one for you.
Best Home Loans When You’re Self-Employed
It’s hard to say which home loan is “best.” Even when you’re self-employed, you more or less have the same options as someone who’s traditionally employed.
But there are a few things you can watch for when applying for a loan to help you find the “best” one for you. Check out the following:
Loan term — how long you’ll need to repay the loan (barring early repayment or refinancing)
Interest rate type — home loans usually have fixed or variable (adjustable) interest rates
Lender fees — some mortgage loans come with additional fees
Requirements — down payment, credit score, income, and other requirements vary by loan type
Loan limits — some loan programs have maximum or minimum limits
Property restrictions — certain loans won’t work for certain types of properties, or for homes located in specific areas (e.g., USDA loans are for rural properties only)
And now… here are some of the more popular home loans for self-employed borrowers.
Fannie Mae and Freddie Mac Loans
Fannie Mae and Freddie Mac were both founded by Congress.
They exist to provide "liquidity" to banks and mortgage companies or lenders... all to make it easier to offer affordable (relatively speaking) housing. They also help guarantee the majority of the mortgages made in the United States.
Fannie Mae and Freddie Mac themselves don’t offer loans. But you can often find loans guaranteed by them. This includes conventional loans — which includes both conforming and nonconforming loans.
OK, but what does this really matter?
For you as a typical homebuyer, it might not be all that important. What really matters is this:
Fannie Mae and Freddie Mac set rules about conventional (conforming) loans. For example, these loans cap out at a certain amount — $726,200 in most counties. You’ll also usually need 20% down to avoid PMI.
FHA Loans
An FHA Loan is guaranteed by the Federal Housing Agency and works quite similarly to conventional loans regarding their terms.
Like conventional loans, FHA loans are offered through private lenders. They often come with a minimum down payment amount of 3.5%, making it easier for borrowers without a lot of savings to buy a home. They’re also designed to help borrowers with a lower credit score buy a home.
Loan amounts vary based on state and county. You can use the HUD website, specifically the FHA Mortgage Limit feature, to determine the maximum loan amount in your area.
You could qualify for an FHA loan if you’re self-employed. You’ll just need to meet other criteria like with any other loan.
VA Loans
VA loans are offered by private lenders and come with their own requirements and limits. They don’t usually require PMI. They also often have relatively lower interest rates and closing costs.
You don’t usually need a down payment either — great for anyone who doesn’t have much money to put down right away.
But you will need to meet minimum active-duty service requirements to qualify. For example, you may need to be an active military member, a veteran, or a qualifying (or surviving) spouse.
USDA Loans
USDA loans are guaranteed by the USDA Rural Development Housing Loan Program (under the U.S. Department of Agriculture). This home loan is often a good choice for those who have limited savings. This is because they also have a 0% minimum down payment requirement.
You’ll need to purchase property located in a “rural” area to get a USDA loan, though. You can check this on the USDA website. You’ll also need to meet the income limit — basically, your household income can’t exceed 115% of the median household income in your area.
Non-Qualified Mortgage Loans
To understand non-qualified mortgage loans, or non-QM loans, let’s first look at qualified mortgage loans.
Have specific and less risky features than other loans
Are designed to be more affordable than other loans
Cannot have negative amortization, balloon payments, or interest-only periods
May have a specific limit in terms of what they can cost
Cannot have “excessive” upfront fees
Must have a lender that verifies potential borrowers’ income, assets, and debts
Non-QM loans don’t necessarily follow these rules or have these features. They sometimes come with higher interest rates. They’re also not guaranteed or backed by the federal government. This could make them a little riskier.
A non-QM loan might be a good idea if you’re self-employed and have fluctuating income… but only if you’re sure you can pay back what you borrow.
Joint Mortgage Loans
A joint mortgage loan is essentially just a mortgage loan — but with a partner. This partner can be your spouse or someone else you know.
These loans come with the typical requirements — proof of income, debts, credit scores, down payments, etc. — all of which will be evaluated by the lender. Since you’re applying with someone, the lender will also consider their eligibility as well.
As with cosigned loans, both borrowers are responsible for the loan. If one person doesn’t pay, the other must do so.
Finding the Best Mortgage Lenders for Self-Employed Individuals
Okay, so lenders.
To be honest, there are countless mortgage lenders out there offering loans to self-employed folks just like you (and us!). If you’re trying to find one… here are a few strats:
Do an online search for “local mortgage lenders” or “home loan lenders near me” — you can use your specific region, too
Ask around if you know anyone in your area who’s used a specific lender they’d recommend
Ask your real estate agent (if you’ve got one) for their recommendations
If you’re going through a specific development site, ask them for their list of preferred lenders
Check on sites like BBB or Trustpilot to find reputable lenders — you can even check their online reputation here
Look for national, regional, and local players — narrow down your options based on size, location, and other factors (see below)
Finding the right lender can be seriously overwhelming. After all, there are so many out there!
But you can narrow down your options in a few ways… such as:
Compare lenders, their reputations, their loan options, their typical rates, terms, fees, and closing times
Call a few lenders up and chat with them — talking on the phone in this day and age? Scary, right? But still surprisingly effective.
Check out their different eligibility requirements
See if they’ve got any bonuses or perks — like first-time homebuyer programs or down payment assistance programs
Review their application processes — online? In person? Hybrid? Streamlined? Secure? Free?
Start creating a list to compare and weed out the lenders that don’t really work for you
See if they offer preapproval — and go ahead and do it
Decide whether you want a more local or personalized experience (which might take more time or come with stricter requirements)... or if the big guys (like NKBC or Rocket) are where it’s at
What If You Don't Qualify for a Home Loan?
You’ve gotten so far in the homebuying process… only to find that you don’t actually qualify for a home loan. That’s rough, but we’ve all been there.
Don’t fret or stress out if you don’t qualify right not. You might just need to make a few changes and try again later. And we get it — you don’t want to wait. But sometimes, waiting means:
More time to save up for a down payment and other expenses
More time to find the right neighborhood and home
The chance to increase your homebuying budget just a little (if you were on the fence between two ranges)
Less stress when it comes to having to make a snap decision
Anyway, if you don’t qualify for a home loan right, here are some tips to get it right the next time:
If your business has only been around for a year or so, that could be keeping you from getting a loan. The solution? Maintain longer track records or profits and work history.
If your business doesn’t seem stable enough, add to your income records. Some lenders might want to work with you, but they need more income verification or general info. Speak with a CPA to help you show them how stable your business is.
Don’t have enough money set aside for a down payment? Take some time to up your savings amount. You can even cut out certain non-essential expenses to temporarily increase your monthly savings to get you there faster.
Don’t qualify for a specific loan or repayment term? Go with a different home loan, like an FHA loan or a non-QM loan. Or consider a different term that’s “less risky” to the lender.
Build up that credit score to boost your chances. Pay down debts, correct errors in your credit reports, and make on-time payments. This might take a bit of time, so start asap.
If your DTI is too high, pay off some of those debts or boost your income. You can even take on a temporary side gig — or maybe take on more client projects and work more hours — to do this. Use this extra cash to pay off your debts.
If all else fails, simply wait for a year and try again. (We know — a year, right? But this is a huge decision — possibly a life-changing one. What’s another year in the grand scheme of things?)
Advantages to Getting a Mortgage While Self-Employed
Weirdly enough, there are a few advantages to getting a mortgage while self-employed. These include:
Potentially astronomical growth: When you’re self-employed or a business owner, your income potential is what you make it. If you get a loan now and your income increases, this spells out good things for your financial future.
Ability to build equity: If you earn significant income, you could put more of it toward paying back the home loan early. This can help you build equity. If you need to later on, you can get a home equity loan or a HELOC and use that equity for future projects.
Access to self-employed loan lenders: Some lenders might be more suited to working with you as a self-employed individual than others. These lenders might offer more flexibility in the overall process.
Of course, there are a few possible disadvantages to getting a mortgage loan while self-employed. In particular, you may face more stringent eligibility requirements when it comes to things like income or business verification.
Do Self-Employed Individuals Pay Higher Mortgage Rates?
Although the process of getting a mortgage loan can be challenging, your mortgage rate shouldn’t (generally) be higher compared to what a traditionally employed person would get.
If you’re trying to find the best mortgage rate, your best bet is to shop around. Look for lenders with lower interest rates and fewer fees. Build your credit score and increases your down payment amount, too, as this can help.
And if you want to get a lower interest rate, you might want to pay more money upfront in the form of purchase points. Talk with your lender about this and see what you can get.
Self-Employed Homeowner? Let's Go!
Okay, let’s take a big step back and just say — altogether now — whew!
It’s a lot, we know. So take it easy and take the time you need to get through the process with minimal hassle, stress, or crying in a corner.
Remember, just because you’re self-employed — business owner, freelancer, independent contractor, whatever — doesn’t mean you can’t buy a home. Most home lenders will still work with you as long as you can prove to them that you’re not a “high-risk” borrower.
And sure, you might need some extra information or documentation — like those pesky profit-loss statements or business insurance. But you should probably have those things anyway (you know, for tax purposes and all).
Whether you’re already super prepared, or you’re very new to the homebuying journey, no worries. You’ve got this.
And when in doubt, check out some of our other homebuying journey guides or pixellated comics. They’re a fun mix of education and entertainment.
Here’s to you and your homebuying journey, you beautiful self-employed person, you.