Self-Employed and Buying a House: How to Get Financed
You’re self-employed, but that doesn’t mean you have to do everything yourself—especially when it comes to financing your home. If the logistics of a self-employed mortgage are holding you back from buying a house, you came to the right place.
The details are key when it comes to the documentation you’ll need to get approved for a loan. That’s why we’ve broken it down into simple steps to get you well on your way to buying a home, well, your way.
What is a self-employed mortgage?
Even though you’re self-employed, buying a house will be the same process as any mortgage: you’ll get a rate quote, apply for a loan, and work out the best terms for you and your lender. And like any other borrower, you’ll have to prove you can pay for it.
The key difference will be the documentation you provide to establish your employment history and debt-to-income ratio (DTI)*. People who don’t work for themselves receive a W-2 form from their employer and can simply use that as their employment documentation. Since you are your own employer, chances are you haven’t been sending yourself that annual W-2 leading up to tax season.
So, what paperwork do you need if you’re self-employed and buying a house?
*Debt-to-income ratio (DTI) is the percentage of your monthly income spent on debt payments.
What paperwork will I need to buy a house while self-employed?
Since you won’t have a W-2, your lender will need your latest Form 1040. Your 1040 should reflect a net income (how much you make after expenses and write-offs) that preferably gives you a DTI of 40% or less.
In addition to your tax forms, most lenders will ask you to provide year-to-date profit and loss statements for your business (with bank records to verify) and payroll statements if you have other employees.
Depending on your unique financial situation, additional documentation may be required. Remember that like any borrower, you’ll also be providing standard information including your credit score, credit history, and bank statements.
What can I do to boost my chances of approval?
Aside from thorough documentation, there are a few ways you can increase your chances of getting approved (and getting a lower rate and term).
Build Up Your Credit Score
Credit score is important for every borrower, regardless of their employment status. As a self-employed mortgage applicant, a high credit score may be a more straightforward indicator of your ability to make payments on time than your income. If your self-employment history is less established, a high credit score can help pick up the slack.
Pay Off Your Debt
Because your net income will appear lower than most applicants after all the tax write-offs you qualify for as the owner of your business, you may have a high DTI on paper. You can’t change your income history, so reducing your debt is a good way to lower your debt-to-income ratio.
Make a Larger Down Payment
If you have the ability to make a larger down payment on your loan, you won’t need to get approved for as high of a loan amount. This means less risk for your lender, so they’re more likely to approve your loan application, even if your documented income is lower than ideal.
Is there anything else I should keep in mind if I’m self-employed and buying a house?
No matter how great your lender is, there are still a few things to keep in mind as you start the home buying process that might differ from the experiences you’ve had before you started working for yourself.
Patience is a Virtue
Your documentation proving employment and income history will be more complicated than it would be for someone who isn’t self-employed. Mortgage professionals want to make sure they get it right, so the processing stage of your home loan application could take longer than you expect. The extra time plays in as your lender goes through the details and makes sure nothing that could improve your chances of approval falls through the cracks.
Early Bird Gets the Worm
In this case, the worm is the financing you need for your home. It might seem obvious, but the sooner you reach out to a loan originator to get a free rate quote and start the process, the better. In a competitive market, you’ll want to be able to move the application along quickly after making an offer. It will be a lot easier to do that if you’ve already got your paperwork in order.
Keep Records Now, Thank Yourself Later
Even if you’re not looking to buy a home right now, it’s never too early to start keeping (organized and detailed) records. Lenders ultimately want to see that you have an established credit and employment history, and that you’re consistently making enough income to pay back your loan. Good record keeping now will save you and your lender a lot of frustration when you’re ready to become a homeowner.
If you’ve already secured a home loan, don’t slack on your record keeping. You may want to refinance down the line or buy a new home, and your financial record with your current home loan will go a long way toward showing you’re a good investment for your lender.
So, now you know: You CAN buy a house while self-employed—as long as you provide thorough documentation of your income. When you’re ready to take the next step, we’re here to help you nail every little detail.
You CAN buy a house while self-employed! The key is to provide thorough documentation of your income, including your Form 1040.
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