How to Get a Mortgage If You Are Self-Employed

Image shows a birds-eye-view of a table with four chairs around it. On the table is a bill, a few pay stubs, and array of documents, a tablet displaying a good credit score, and a checkbook. Text reads: "Getting a mortgage when you're self-employed: keep your debt low, have a consistent work history (at least 2 years of steady income), compile your business and personal documents, establish good credit, have some cash reserved"

The Balance / Jaime Knoth

If you're self-employed, you may think that getting a mortgage is out of your reach. But working for yourself doesn’t necessarily mean you’ll have to forgo the idea of owning a home. The process may just look a bit different.

We break down how to get a mortgage if you’re self-employed, from what paperwork you’ll need, to how your work history and credit score play into the equation.

Work History Matters 

In this case, your work history matters. Lenders want to see that you’ve been pulling in a steady income for at least two years and have the paperwork to prove it. This is especially important if you’re a 1099 worker.

So why does your work history matter? Mortgage companies want to ensure that you’ll be able to pay the mortgage, that you bring in a steady income, and that your income has trended upwards over the years.

One important thing to note: If you recently became self-employed, and have a W-2 from a similar field, some lenders may make an exception to the two-year rule.

Your work history also comes into play when lenders are determining your approval amount. Here's why it matters: Lenders generally take an average of your earnings for the past few years to determine the mortgage amount you’ll be approved for. 

The Paperwork You’ll Need

The paperwork you’ll need when applying for a mortgage as a self-employed worker can be a bit more in-depth than if you were a W-2 employee.

You will have to provide documents ranging from business and personal tax returns for the past two years, profit and loss statements, or a 1099 Form, business bank statements, a list of your assets, and a list of all your debts and monthly payments. In this case, it may be helpful to hire an accountant to help you prepare the necessary documents so you don't overlook or forget anything.

Build Up Your Credit Score First

When trying to obtain a mortgage as a self-employed worker, your credit score matters. Make sure your credit score is in top shape when you apply for a mortgage, and if you can wait to pay off a significant amount of debt before applying, do so. It also pays to check your credit report carefully to ensure there are no mistakes. A lender may also check your business’ credit report, so be sure you’re covered there, as well.

Another big indicator of whether you’ll be approved? A low debt-to-income ratio, as in, the portion of your monthly earnings that go toward paying debt, such as student loans or a car payment. Lenders also prefer that you have no consumer debt (i.e., credit card debt) and large cash reserves.

Deductions Can Hurt You

As a business owner, you’re probably familiar with business tax deductions and how they can help lower your taxable income and your tax bill.

But when applying for a mortgage, these deductions can actually hurt you. Here’s why: Lenders generally consider your after-deduction income when deciding whether to approve your mortgage application. So, if you claim a lot of deductions when doing your taxes, it can actually lower your after-deduction income so significantly that you may not qualify for a mortgage, or the approval amount may be too low. As such, keep all this in mind, run the cost-benefit analysis and trade-off of being able to receive a mortgage versus claiming a lot of deductions on your taxes.

While applying—and being approved for—a mortgage when you’re self-employed may seem daunting, it’s not as complicated as you might think. Provided that you have the correct documentation, a high credit score, and a low debt-to-income ratio, as well as a healthy income and cash reserves, securing a mortgage when you’re self-employed is possible.

Other Tips to Take Note of

  • Since getting a mortgage when you’re self-employed can be more complicated than if you were a salaried worker, you may want to consider hiring a mortgage broker.
  • Another professional that may be worth paying for? An accountant, who can help you gather the necessary paperwork when applying for a mortgage.
  • Credit score and debt-to-income ratio matter, so ensure both of these are in great shape before you apply for a mortgage.
  • Don’t mix business and personal accounts. This can hurt your chances of being approved for a mortgage.
  • You may have to come up with a larger down payment to qualify for a mortgage, so be sure to factor that into your plans.
  • If you don’t qualify for a mortgage on your own, you can apply with a co-borrower to improve your chances.