- \n
- Know what lenders want from self-employed applicants<\/a><\/li>\n
- Improve your credit score<\/a><\/li>\n
- Lower your debt-to-income ratio<\/a><\/li>\n
- Try to save up for a higher down payment<\/a><\/li>\n
- Gather all your documentation<\/a><\/li>\n
- Consider a low-doc or no-doc mortgage<\/a><\/li>\n
- Consider applying with a co-borrower<\/a><\/li>\n
- Shop around for the best rates<\/a><\/li>\n<\/ol>\n
<\/a><\/p>\n
1. Know what lenders want from self-employed applicants<\/h2>\n
Lenders ultimately want to make sure self-employed mortgage borrowers have stable income<\/a> that they can rely on for the foreseeable future.<\/p>\n
When applying for a home loan<\/a>, borrowers will generally need to show at least two years\u2019 worth of uninterrupted self-employment income. That helps lenders see that the borrower is in overall good financial health.
\n<\/a><\/p>\n2. Improve your credit score<\/h2>\n
Credit scores play a big role<\/a> in whether an applicant qualifies for a mortgage<\/a> and the interest rate they get. Lenders might not have a target credit score specifically for self-employed people, but they\u2019re generally looking for a score of at least 620.<\/p>\n
Because lenders are tightening standards, you might need a higher credit score these days. The average FICO credit score among mortgage borrowers in September 2020 was 767, according to Ellie Mae.<\/p>\n
<\/span>Tip:<\/b> Before applying for a self-employed mortgage loan, check your credit report for errors and evidence of fraud. If you notice inaccuracies, you can dispute them with the credit bureaus. Also check your credit scores to see if they need work.<\/div><\/div>\nHere are some ways you can improve your credit<\/a>:<\/p>\n
- \n
- Pay down your debt balances<\/li>\n
- Keep your credit card balance under 30% of its credit limit<\/li>\n
- Don\u2019t apply for new credit before applying for a mortgage<\/li>\n
- Make all your bill payments on time<\/li>\n<\/ul>\n
Learn More: <\/i><\/b>Credit Score Needed to Get a Home Loan<\/i><\/b><\/a><\/p>\n
<\/a><\/p>\n
3. Lower your debt-to-income ratio<\/h2>\n
Your debt-to-income ratio<\/a> measures how much of your monthly income goes toward debt payments. This number helps lenders determine if you can comfortably afford a mortgage payment.<\/p>\n
There are two types of DTI ratios:<\/p>\n
- \n
- Front-end DTI: <\/b>This shows how much of your income goes toward a housing payment<\/li>\n
- Back-end DTI: <\/b>This shows how much you spend on all debts, including housing. Lenders generally look for a back-end DTI ratio of 43% or less.<\/li>\n<\/ul>\n
Let\u2019s say you earn $5,000 a month before taxes. You pay $300 a month toward student loans and $350 for an auto loan, and your estimated future monthly mortgage payment is $1,200. Here\u2019s how you calculate both ratios:<\/p>\n
Front end:<\/b><\/p>\n
$1,200 \/ $5,000 = 0.24 x 100 = 24%<\/p>\n
Back end<\/b>:<\/p>\n
($300 + $350 + $1,200) \/ $5,000 = 0.37 x 100 = 37%<\/p>\n
<\/span>Tip: <\/b>Lenders don\u2019t have DTI requirements specifically for self-employed mortgage borrowers, but a lower ratio may improve your chances of approval.<\/p>\nIf you need to improve your DTI ratio to qualify for a mortgage, work on paying down your debts and increasing your income.<\/div><\/div>\n
<\/a><\/p>\n
4. Try to save up for a higher down payment<\/h2>\n
While you can put down as little as 3% with some types of mortgages, a higher down payment<\/a> offers several benefits:<\/p>\n
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- It helps you appear less risky to lenders because you\u2019re putting more equity into the home<\/li>\n
- You can avoid private mortgage insurance<\/a> if you put down at least 20% on a conventional mortgage<\/li>\n
- The lender may lower the interest rate for borrowers with a higher down payment<\/li>\n<\/ul>\n
If you\u2019re having trouble coming up with a down payment, check out down payment assistance programs<\/a>. These are geared toward first-time homebuyers, but repeat homeowners might also qualify.<\/p>\n
<\/p>\nCredible makes finding a mortgage easy<\/strong><\/span><\/h3>\n
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- \n
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- One simple, safe TLS-encrypted form<\/li>\n
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5. Gather all your documentation<\/h2>\n
Lenders will require extensive documentation from self employed mortgage loan borrowers to verify their income and make sure the borrower can make their mortgage payments.<\/p>\n
Before heading to a lender, do a little prep work by gathering these documents:<\/p>\n
- \n
- Two years\u2019 worth of business tax returns and personal tax returns<\/li>\n
- Copies of current state or business licenses<\/li>\n
- IRS Form 4506-T, which allows lenders to access your tax records<\/li>\n
- A profit-and-loss statement, including debts and expenses<\/li>\n
- A balance sheet<\/li>\n
- Asset account statements, such as retirement or investment accounts<\/li>\n
- Any additional income, such as Social Security or disability<\/li>\n<\/ul>\n
The lender will look for taxable income and may subtract anything that doesn\u2019t seem stable and consistent.<\/p>\n
<\/span>If you\u2019ve been in business for less than 24 months, the lender may expect to see more documentation related to your business, including:<\/p>\n- \n
- A letter from a CPA attesting that you\u2019ve been in business for at least one year<\/li>\n
- Evidence of membership in any professional organizations<\/li>\n
- Communications and contracts from current clients<\/div><\/div><\/li>\n<\/ul>\n
The lender might also request a W-2 from your previous employer. With a strong work history in the same field \u2014 proven with the W-2 form \u2014 you might be able to get a home loan with as little as 12 months of self-employed work.<\/p>\n
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6. Consider a low-doc or no-doc mortgage<\/h2>\n
A \u201clow-documentation loan\u201d or \u201cno-documentation loan\u201d allows self-employed borrowers to apply for a mortgage without extensive financial documentation. In lieu of tax returns, lenders may review your assets, ask you to state your income, or base the loan entirely on the collateral.<\/p>\n
There are four types of low- and no-doc mortgages<\/a>:<\/p>\n
![\"\"](\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/01\/Main-types-of-no-doc-and-low-doc-loans-infographic.png\")
<\/p>\n- \n
- SISA (stated income, stated assets): <\/b>With this type of loan, you tell the lender how much you earn without providing tax returns or W-2s. This can be useful if you have significant income and assets that can\u2019t be documented through a W-2, 1099, or pay stubs. But you might need to provide 12 to 24 months\u2019 worth of bank statements<\/a> so the lender can calculate your monthly cash flow.<\/li>\n
- SIVA (stated income, verified assets): <\/b>You tell the lender how much you earn, but they can verify your assets through documents such as personal bank account statements.<\/li>\n
- NIVA (no income verification, verified assets): <\/b>You can verify your assets but can\u2019t document your income \u2014 so the lender doesn\u2019t take your earnings into account. For example, a retiree who draws income from their retirement accounts has verifiable assets.<\/li>\n
- NINA (no income verification, no asset verification): <\/b>You can\u2019t provide documents for income or assets, so the lender approves your loan based on the collateral and other non-income factors. For example, someone with money in a foreign bank may not be able to provide documentation that\u2019s acceptable to U.S. lenders.<\/li>\n<\/ul>\n
It might be difficult to find a lender that offers such mortgages, and they may come with higher credit score requirements than traditional mortgages. Additionally, the interest rate might be up to 3 percentage points higher than a loan with a standard rate.<\/p>\n
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7. Consider applying with a co-borrower<\/h2>\n
A self-employed borrower who applies for a mortgage with a co-borrower \u2014 a spouse, for example \u2014 might be able to sidestep some of these documentation requirements.<\/p>\n
Your co-borrower should have a W-2 that shows they earn enough to comfortably cover the mortgage payments along with other household expenses. Having little to no debt and a good amount of cash reserves will also boost your chances of approval.<\/p>\n
<\/span>Tip:<\/b> Talk with your lender about this approach. They can include you on the loan \u2014 so you\u2019ll both be responsible for payments and own the home together \u2014 but the lender may ignore your income in the underwriting process.<\/div><\/div>\nCheck mortgage rates: <\/b><\/p>\n
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- 30-year fixed mortgage rates<\/a><\/li>\n
- 15-year fixed mortgage rates<\/a><\/li>\n<\/ul>\n
<\/a><\/p>\n
8. Shop around for the best rates<\/h2>\n
- 15-year fixed mortgage rates<\/a><\/li>\n<\/ul>\n
- SIVA (stated income, verified assets): <\/b>You tell the lender how much you earn, but they can verify your assets through documents such as personal bank account statements.<\/li>\n
- SISA (stated income, stated assets): <\/b>With this type of loan, you tell the lender how much you earn without providing tax returns or W-2s. This can be useful if you have significant income and assets that can\u2019t be documented through a W-2, 1099, or pay stubs. But you might need to provide 12 to 24 months\u2019 worth of bank statements<\/a> so the lender can calculate your monthly cash flow.<\/li>\n
- The lender may lower the interest rate for borrowers with a higher down payment<\/li>\n<\/ul>\n
- Back-end DTI: <\/b>This shows how much you spend on all debts, including housing. Lenders generally look for a back-end DTI ratio of 43% or less.<\/li>\n<\/ul>\n
- Front-end DTI: <\/b>This shows how much of your income goes toward a housing payment<\/li>\n
- Improve your credit score<\/a><\/li>\n