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

Being your own boss, making your own schedule, charting your own path, building something from scratch — being self-employed feels like freedom. But that freedom comes at a cost, especially if you’re applying for a mortgage. When you’re self-employed and apply for a mortgage, you won’t be able to provide any W-2s; instead, lenders will have to rely on less traditional information to determine if you qualify for a loan and for how much.

Below, we’ll cover everything you need to know about mortgage financing for self-employed borrowers, including what lenders are looking for, the types of loans available to you, the hurdles you’ll likely face, and some tips to make getting a self-employed mortgage much easier.

Can Self-Employed People Get a Mortgage Loan?

Yes, you can qualify for a mortgage if you’re self-employed. Whether you’re a freelancer, independent contractor, gig worker, or small business owner, you aren’t condemned to a life of renting (or getting a home loan in your partner’s name). The difference is that lenders will scrutinize your income and financial stability more heavily, and you’ll face stricter documentation requirements than a borrower with traditional W-2 income.

What changes is how lenders check your ability to repay your home loan. Rather than pay stubs, W-2 forms, and employer verification, self-employed borrowers typically must supply tax returns, profit and loss statements, and bank records. Some lenders may also have programs tailored to nontraditional income, such as bank statement loans and nonqualified mortgage loans (non-QM loans). So while the path to homeownership is a little longer — and has a few more potential roadblocks — you can absolutely get approved for a mortgage with self-employed income.

Recommended: Getting a Mortgage Without a Regular Income

What Lenders Look For in Self-Employed Mortgage Applications

When you apply as a self-employed borrower, underwriters need to answer a few core questions to ensure you can actually repay the loan:

•   Is your income stable, reliable, and sufficient?

•   Are your business finances legitimate and well-documented?

•   Are you creditworthy and low-risk?

•   Do you have the right amount of cash reserves and assets, and what other debt responsibilities do you currently have?

Here are the details a lender will examine to get to the bottom of its questions about your finances:

Proof of Income and Financial Stability

For starters, lenders need evidence that your business — whether you deliver food or walk dogs through an app, freelance from a home office for several clients, or own a brick-and-mortar small business with employees — generates consistent revenue over time, not just during seasonal spikes or from one-off windfalls.

Consistent income is crucial. Lenders will look for patterns and sustainability and may even review your client contracts or industry trends and forecasts to determine whether your income is likely to continue.

Two Years of Tax Returns

One of the most common benchmarks for self-employment mortgage loans is your two most recent personal and business tax returns. This gives the lender insight into your declared income and how tax deductions have affected it.

Many conventional lenders expect this level of history to assess trends and eliminate surprises; if you’ve been self-employed for less time, it may be harder to get a mortgage. That said, there are some exceptions. If you only have one year of self-employment history but can prove multiple years in that line of work, a lender may be more flexible.

Profit and Loss Statements

A year-to-date profit and loss (P&L) statement, often prepared by your accountant, helps paint a current picture of your business. A P&L statement shows your revenue, expenses, and net profit. Lenders may compare your P&L to your tax returns and ask for an explanation if there’s a big discrepancy.

Bank Statements and Business Licenses

Lenders may also request one to two years of personal and/or business bank account statements to understand cash flow (deposits in and withdrawals out). This helps underwriters get a feel for how your business really operates.

If relevant, you may also need to supply any business licenses, registrations, or proof of client contracts to help confirm your business is legitimate. This replaces the more traditional employment verification lenders may do for other borrowers.

Debt-to-Income Ratio

Whether you’re self-employed or have traditional employment, a lender will review your debt-to-income ratio (DTI) to ensure you aren’t juggling too many monthly debt payments already for your level of income. The threshold varies by lender, but many require a DTI below 43%. That is, your monthly debts shouldn’t exceed 43% of your gross monthly income. Nontraditional loan programs may allow for a higher ratio, but this can vary.

Credit Score

Similarly, a lender will review your credit score to ensure you’re a responsible borrower. A strong credit score signals that you pay bills reliably; this is especially important for self-employed borrowers whose income may be less consistent. Mortgage credit score requirements vary by type of loan and by lender.

Self-Employed Mortgage Qualifications

When determining if you qualify for a mortgage during the underwriting process, the lender will review the following:

Credit Check

First things first, be prepared for a hard credit inquiry. The lender will pull your credit report (so make sure yours are unfrozen with all three major credit bureaus) to get a better idea of whether you’re creditworthy enough to qualify.

Assets

To get a better understanding of your financial situation, lenders will want to review all of your assets. This includes cash in your bank account, but also any investments, retirement accounts, real estate equity, or business assets.

Cash Reserves

Lenders may also want self-employed borrowers to have significant cash reserves — funds you can rely on to pay for several months of mortgage payments, even if you had no income. This cushion helps offset the risk of fluctuating income.

How Lenders Evaluate Self-Employment Income

Lenders evaluate self-employment income even more carefully than they do for traditional employees. Using your tax returns and P&L statements, they’ll review your gross income, your business expenses, and your resulting net income. They may also review industry trends to understand how your income is likely to change over the course of your loan repayment.

Types of Mortgages for Self-Employed Borrowers

Self-employed borrowers can qualify for many of the same types of mortgages as more traditional borrowers, but there are specialized mortgages, such as bank statement loans, that might be even easier to get if you’re self-employed.

Conventional Loans

Conventional loans are “standard” mortgages that aren’t insured or backed by the government. They offer a lot of variety and competitive rates, but they’re also harder to qualify for. If you’re self-employed, meeting the stringent requirements can be tough. If you have a spouse with traditional income, you may be able to qualify more easily.

FHA Loans

FHA loans, backed by the Federal Housing Administration, have more lenient requirements on credit score and down payment, which means self-employed borrowers can qualify more easily. Even so, FHA lenders still typically expect two years of tax returns from self-employed borrowers, and they’ll examine your business history and documentation carefully.

Bank Statement Loans

A bank statement mortgage, often called a self-employed mortgage, is one of the easier paths to homeownership for self-employed borrowers. As the name suggests, one of the largest factors lenders consider for a bank statement loan is your bank statements (either for a personal or business account, depending on how you manage your finances).

You may be able to qualify for a bank statement loan without any tax returns, but these mortgages also tend to have larger down payment requirements and higher mortgage interest rates. Not every lender offers this type of loan, either.

Non-QM Loans

A nonqualified mortgage is any type of mortgage that doesn’t meet the requirements for a traditional qualified mortgage. These requirements were established by the Consumer Financial Protection Bureau (CFPB) and include rules such as:

•   A DTI ratio cap of 43%

•   Loan terms limited to 30 years

•   No “risky” features such as balloon payments, interest-only payments, or negative amortization

Non-QM loans can have looser requirements and allow lenders to verify ability to repay with less traditional processes, which may be ideal for freelancers, independent contractors, and small business owners.

It’s important to note that non-QM loans are not the same as the subprime loans of the Great Recession. These still require enough documentation (often tax returns, 1099s, bank statements, and P&L statements) for a lender to fully vet a borrower and ensure their ability to repay. Much like bank statement loans, non-QM loans may have larger down payment requirements and higher interest rates.

Common Challenges with Mortgage Financing for Self-Employed

Clearly, getting a mortgage as a self-employed worker is possible, but there are a lot more hoops to jump through when you go this route. Here are some of the biggest challenges you may face.

Inconsistent Income

Lenders typically want to know you have consistent income — and enough to cover your bills each month. Variability in income can make it harder for lenders to rely on your numbers. Underwriters tend to favor smoother, predictable income patterns. If you have seasonal highs and lows, it’s important to demonstrate significant cash reserves to cover the slower times.

High Tax Deductions

When you file taxes as a self-employed individual, tax deductions are your best friend. Because self-employed workers generally pay a higher percentage of their income in taxes, reducing your taxable income by deducting as many business expenses as possible is key. However, that can come back to bite you when applying for a mortgage. Your tax returns will show a lower adjusted gross income, which can make it harder to qualify for a more expensive home.

If you know you’ll be buying a home down the road, think about reducing your small business tax deductions in the years leading up to your home purchase. It may hurt to pay a little more in taxes now, but doing so may help you get approved for a mortgage — and at a more competitive rate.

Limited Documentation

If you’re a sole proprietor or gig worker who doesn’t have a formalized business structure, you may struggle to come up with all the documentation needed to support your cause. Work with an accountant to develop a profit and loss statement that paints a complete picture of your finances.

Recently Self-Employed

Typically, mortgage lenders want to see two years of tax returns from self-employed borrowers. If you’ve just made the leap to self-employment, you may not be able to qualify for a mortgage on your own right away.

Tips to Improve Your Odds of Application Approval

Being self-employed and getting a mortgage may feel like an endless uphill battle, but there are ways to tip the scales in your favor. Here are some tips to improve your odds of getting your mortgage application approved as a self-employed borrower:

Reduce Personal and Business Debt

Lower your debt-to-income ratio by paying down credit cards, auto loans, and any business debts. Avoid taking out new loans ahead of your mortgage application.

Improve Your Credit Score

It may take several months, but if you can build your credit score, you can greatly improve your chances of getting approved for a mortgage. “Working to build your credit score before applying for a home loan could save a borrower a lot of money in interest over time. Lower interest rates can keep monthly payments down or help you pay back the loan faster,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. You can bolster your credit score by:

•   Paying your bills on time and in full every month

•   Reducing how much you spend with your credit card and paying down outstanding debt

•   Reviewing your credit report for errors and disputing them with the credit bureaus

•   Not opening any new credit accounts in the year leading up to your application

•   Keeping up with your progress using free credit score monitoring

Make a Larger Down Payment

Some of the more nontraditional mortgage options for freelancers and independent contractors require a larger down payment, such as non-QM loans and bank statement loans. Even if you’re going the traditional-mortgage route, making a large down payment is a good show of faith to the lender that you are financially responsible.

Separate Personal and Business Finances

Maintain clear, separate bank accounts and bookkeeping for business and personal finances. This clarity helps underwriters trace cash flows and strengthens your case when you apply.

The Takeaway

If you’re self-employed, you don’t have to rule out homeownership. Freelancers, small business owners, and even gig economy workers can and do get mortgages to purchase their dream home. It just requires more thorough documentation and a solid history of doing good business. A solid credit score and some cash reserves won’t hurt, either.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How many years do I need to be self-employed to get a mortgage?

Typically, lenders want to see at least two years of tax returns with your self-employed income to consider you for a mortgage. However, you may be able to get a mortgage with less time as an independent contractor or small business owner if you have prior experience in a related W-2 role or if you use a less traditional mortgage option, such as a bank statement loan or nonqualified mortgage loan.

Do I need to show both personal and business tax returns?

If you file personal and business taxes separately, you’ll need to provide both sets of tax returns to the lender. This lets underwriters assess your net income, growth, and deductions. Sole proprietors who only file a personal income tax return may need to offer additional documentation, such as a profit and loss statement.

Can I use 1099 income to qualify?

Yes, independent contractors and gig workers who rely on 1099 income can use that income to qualify for a mortgage. The 1099s are included with tax returns, but underwriters will likely still want to review other documentation, such as bank statements and profit and loss statements.

What if my income fluctuates year to year?

Many freelancers and small business owners deal with fluctuating income from year to year (or even quarter to quarter, or month to month). Lenders know this and can accommodate it. While lenders would ideally love to see consistent income (or income that only grows over time), they are able to take a two-year average when calculating your qualifying income. However, you should be ready to explain the inconsistencies. Your accountant can help you organize your finances and help you make the strongest case to a lender.

What are the risks of self-employed mortgages?

The biggest risk in getting a self-employed mortgage is that your income could be considered more volatile. A downturn in your business could make it harder for you to make your monthly mortgage payment. And because you’re seen as a higher risk, you may have a higher interest rate on your mortgage, which makes your monthly payment more expensive.

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Photo credit: iStock/miodrag ignjatovic

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