Buying a house is an exciting milestone, but it can also be stressful — especially if you’re self-employed and have to jump through extra hoops to secure a loan. Self-employed borrowers may have even more difficulty when applying for a jumbo loan for a more expensive house.
Below, we’ll walk through jumbo loans for the self-employed: types of loans available, typical requirements, and what the lending process is like.
What Are Jumbo Loans for the Self-Employed?
Each year, the Federal Housing Finance Agency (FHFA) sets a maximum limit on the dollar amount of mortgages that government-sponsored Freddie Mac and Fannie Mae will purchase. Loans within those limits are called conforming loans.
But what if you want a more expensive house and need a larger mortgage? That’s where jumbo loans come in. Jumbo loans, also called non-conforming loans, pose a higher risk to the lender and thus come with stricter requirements for borrowers.
Self-employed individuals can get conforming mortgages just like any other borrowers, though they may be asked for additional documents to prove their income. (The same is true when it comes to personal loans for the self-employed.) But what about jumbo loans for self-employed individuals? Are those possible?
Many lenders allow self-employed individuals to apply for and secure a non-qualified mortgage, also called a non-QM loan. Lenders enable borrowers to qualify for a non-qualified mortgage using alternative methods, particularly for income verification. Some examples of non-QM loans include 1099-only loans, bank statement loans, and investor cash flow loans.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
A 1099-only loan is just what it sounds like. Self-employed individuals typically receive 1099s, not W-2s, at tax time. Though lenders usually review an applicant’s W-2s, a self-employed individual may be able to apply for a jumbo loan by showing 1099s from previous years. Loan requirements will vary by lender.
Why not just look at previous tax returns? All 1099 income appears on your tax return, after all. However, self-employed workers write off business expenses to lower their taxable income and reduce their overall tax burden. An individual who brings in good money but has a lot of write-offs may have a harder time qualifying based on their tax return, which shows adjusted gross income, but could qualify based on their 1099.
Bank Statement Loan
Another route that self-employed individuals can take to get a jumbo mortgage loan is through bank statements alone. Again, requirements will vary by lender, but lenders offering bank statement mortgages will often approve self-employed individuals for jumbo loans with just recent bank statements (personal or business) demonstrating income, rather than with traditional tax documents.
Investor Cash Flow Loan
Self-employed individuals who want to diversify by purchasing an investment property may be able to get a jumbo loan with no income verification at all. Instead, with an investor cash flow loan, borrowers can get a loan by using the anticipated cash flow from the rental property.
💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.
Challenges Faced by Self-Employed Borrowers
These non-QM loan options for self-employed borrowers address typical challenges that self-employed borrowers face when applying for a mortgage, particularly a jumbo mortgage. For instance, self-employed borrowers:
• Can’t produce W-2s to verify their income or employment.
• May have a lot of write-offs on their tax return that make it look like they earn less.
• May otherwise need to provide a lot of complicated business documents for underwriting.
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Jumbo Loan Underwriting Guidelines
Jumbo loans may allow you to buy a more expensive home, but you’ll have to meet a lot of strict requirements, self-employed or not. Below are the core underwriting guidelines that lenders use when considering jumbo loan applications:
• Credit score: Credit score requirements for jumbo loans will vary by lender, but expect to need a higher credit score than you’d need for a more traditional loan. A credit score of 700 or above should do the trick, although some lenders will have more lenient standards, while some may have tighter restrictions for a second home or investment property.
• Debt-to-income ratio: Lenders may have varying income requirements for jumbo loans, but they’ll also look at your debt-to-income (DTI) ratio. If you have significant monthly debt obligations compared to your monthly income, you may not qualify for a jumbo loan.
• Cash reserves: For certain loans and certain applicants, lenders may require you to have mortgage reserves — liquid assets (money in a bank account or certificate of deposit, stocks and bonds, or vested retirement funds, for instance) set aside to cover a certain number of months’ worth of housing costs. The money you’ll spend on your down payment and closing costs is not considered part of your cash reserves. For a jumbo loan, it’s possible you’ll need to have six to 12 months’ worth of reserves.
Tips for Increasing Chances of Approval
As a self-employed borrower, it’s crucial that you work on your credit score, reduce your monthly debts, and have strong evidence of solid monthly income before trying to qualify for a mortgage, particularly a jumbo loan. Here are a few tips to increase your chances of approval:
• Work on your credit score first: Having a high credit score is one of the major requirements for approval. If you’re right beneath the 700 threshold, it may be worth it to wait a few months if you’re actively working on maintaining a good credit score.
• Pay off outstanding debts: An easy way to decrease your DTI (and thus increase your chances of approval) is to pay off debts before buying a house. Stop accruing new credit card debt, and work on paying off existing debts before applying. If you’re able to knock out your credit card debt or pay off your car before applying for a jumbo loan, you may have a better shot.
• Collect all the documentation you can: Having documentation of your income and employment is key. As a self-employed individual, it might be worth it to work with an accountant to compile all the paperwork.
Understanding the Jumbo Loan Process
The jumbo loan process is similar to the standard conforming loan process, but it may take longer. Here are the general steps for getting a jumbo loan:
1. Make sure you’re qualified: Review your credit score, DTI, and cash reserves to make sure you’re likely to get approved for a jumbo loan. Gather all the necessary documents.
2. Find a lender: Not every lender offers jumbo loans to self-employed borrowers. Do some research to find out which lenders will offer you the best chances. Loan terms and interest rates will vary depending on the lender, the current market, and your finances. Get preapproved for a loan.
3. Make an offer on a home: Once you have funding approved, find a house you love and put in an offer.
4. Get an appraisal: As with a conforming mortgage, the lender will require a home appraisal to ensure the home is worth what you’re borrowing.
5. Close on the home: Because jumbo loans are larger, expect to need a larger down payment. Closing costs will also be higher. Because jumbo loans pose more risk to lenders, the timeline between the offer and closing may take longer than for a traditional home loan.
💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.
Pros and Cons of Jumbo Loans for Self-Employed Individuals
Jumbo loans are possible for self-employed individuals, but there are also some drawbacks to consider. Self-employed borrowers should keep the tough requirements in mind when considering purchasing a home above the FHFA conforming loan limits, but if they really want that more expensive home, it could be worth the effort.
Here are the pros and cons to consider:
• Higher loan limits: Self-employed individuals who make enough money to justify buying a house priced above conforming loan limits can get jumbo loans to finance their dream home.
• Flexible underwriting: By using non-QM loans, self-employed borrowers can use documentation like 1099s or bank statements instead of W-2s and tax returns to demonstrate their income and employment.
• Higher interest rates: Jumbo loans may have higher interest rates because they pose a greater risk to the lender.
• Stricter qualification criteria: Anyone applying for a jumbo loan should be prepared for stricter qualification criteria, but self-employed borrowers may have even more hurdles to clear. Lenders might want to see multiple years’ worth of income — and the income, credit score, and DTI thresholds may be higher than for a conforming loan.
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Self-employed individuals may have a tougher time getting approved for a jumbo loan, but it’s not impossible. Having a strong credit score and low DTI are important, but having the proper documentation to demonstrate stable income is also crucial.
When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.
How many years of tax returns do I need to provide for a jumbo loan?
Typical borrowers will need to provide at least two years of tax returns to get a jumbo loan. Self-employed individuals, however, may need to provide additional documentation to get approved for funding.
Can I use 1099 income to qualify for a jumbo loan?
Some lenders allow you to use 1099 income to qualify for a jumbo loan. Self-employed individuals who don’t receive any W-2 income may want to consider lenders that offer 1099-only loans.
What is a 1-year self-employed mortgage and how does it work?
Lenders typically want to see at least two years of stable income. Borrowers who have been self-employed for just one year, however, may be able to get a mortgage from specific lenders.This mortgage can be more challenging to get: Lenders will need borrowers to demonstrate the stability of their income, the financial strength of their business, and a promising business outlook. Usually, the self-employed borrower needs to have been in the industry longer than a year, even if they’ve only been self-employed in said industry for a year.
Are there any special requirements for 1099 home loans?
Each lender will have its own requirements for a 1099 home loan, like minimum credit score, maximum DTI, and loan limits. Check a lender’s requirements before applying.
What is the minimum credit score required for a jumbo loan?
Credit score requirements for jumbo loans vary by lender, but typically, you’ll need at least a 700 score to qualify. Before applying, ask potential lenders what their minimum credit score requirements are. Some lenders may approve loans for borrowers with scores below 700, but interest rates may be higher.
How much of a down payment do I need for a jumbo loan?
Down payment requirements for jumbo loans vary by lenders. Many lenders require that you put at least 20% down for a jumbo loan, but in some cases, lenders may approve jumbo loans with as little as 5% down.
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