Being self-employed doesn’t have to make it harder to get a mortgage loan. You just have to know what kinds of documentation you need and how to make yourself more attractive to lenders.
If you’re one of the 60 million Americans (35% of the workforce) freelancing to earn your keep, you know the benefits of ruling your own little dominion. But you’re also acutely aware of the difficulties that go along with self-employment and inconsistent paychecks. If you’re looking to get a mortgage — which can be stressful enough — you don’t want your freelance life to tank your homeownership dreams. And it doesn’t have to.
What does self-employed mean?
Freelancers and gig workers are independent contractors and considered self-employed. In other words, they don’t work for someone else or receive a W-2 wage and tax statement come tax time. Those who are self-employed usually receive a 1099-NEC, which reports non-employee compensation.
Can I get a mortgage if self-employed?
Yes, you can get a mortgage when self-employed. Regardless of whether you’re writing blogs for a website, running errands for others or driving people to the airport for pay and report your income to the IRS, the rules to “get a mortgage or refinance one are the same,” says Juan Rodriguez, origination manager for Zillow Home Loans*, a direct lender specializing in self-employed borrowers, in Irvine, California. However, as a self-employed borrower, you may be required to provide additional documentation.
How to get a self-employed mortgage loan
Getting a mortgage is best not left to spur of the moment, especially if you’re self-employed, so it’s a good idea to get pre-qualified for your loan first. The “good news is that lenders cannot discriminate against you based on your income type. You either qualify or you don’t based on your income,’ Rodriguez says.
Get your finances in order
Lenders typically want a minimum credit score of 580 for FHA, VA and USDA loans and 620 for conventional loans, according to Rodriguez. So, you may need to raise your credit score and save for a higher down payment. You also want to minimize your write-offs, if possible. Your CPA wants you to pay less in taxes, but as Rodriguez points out, if you report a loss to the IRS, “lenders and banks see that as negative income, and you won’t qualify for a mortgage. It’s great for tax purposes, but not great for qualification purposes.”
Track where your income is coming from
You’re probably tracking your income for your taxes anyway, but if you’re self-employed and applying for a mortgage, now is the time to really buckle down and do it.
Plan in advance
You won’t know until you provide your records to a loan officer if you qualify for a mortgage. Rodriguez suggests submitting your tax returns to a lender or loan officer before you plan to buy “so we can determine your income as reported to the IRS. And if it’s not enough to qualify for the home you want, we can advise you on what amount of income is needed.’ In addition, lenders may be able to work with your specific business write-offs and advise you on how to improve your profit and loss statement.
Consider making a higher down payment
Putting more money down may help lower your mortgage payment. Currently, every $10,000 lowers your principal and interest payment by around $50 a month. If you do not qualify for a mortgage due to your debt-to-income (DTI) ratio, you may need to have more money down to bring your ratios in line with getting approved.
Shop around
Compare rates and fees from at least three lenders, and if this is your first time, work with someone who specializes in first-time homebuyers (anyone who has not owned a property in the last three years) that will answer all your questions. You can speak with one of our loan officers at Zillow Home Loans* to begin your lender search.
| Program | Rate | 1W Change | APR | 1W Change |
|---|---|---|---|---|
| 30-Year Fixed Rate | 6.61% | 0.18% | 6.69% | 0.18% |
| 15-Year Fixed Rate | 5.95% | 0.19% | 6.08% | 0.19% |
Last updated 11/3/2024. See legal disclosures.
What documents do you need for a self-employed mortgage?
Lenders need information to get a sense of whether you’re a good credit risk and will be able to pay them back over the life of the loan. For the self-employed looking to get pre-approval for a mortgage, lenders will be looking a little more closely and will generally need the following:
At least two years of federal tax returns
You’ll need to provide personal income tax returns typically for at least two years (as many lenders use the average of your past two years’ income). According to Rodriguez, lenders will check with the IRS that the taxes you sent are the taxes you actually filed. He added, however, that if you’ve owned a freelancing business for five years or more, “we may be able to approve you for a mortgage — typically on a conventional loan with Freddie Mac — with one year of federal returns.” While lenders prefer you have a solid record of steady employment and income stability, getting a mortgage without two years of work history is more than possible.
Corporate tax returns
In addition to your personal tax return, you’ll also typically need at least two years of business tax returns. Every American worker files a 1040 form. A sole proprietor can file their business on a 1040 Schedule C; this is your profit and loss statement. If you’re incorporated, you’d use form 1120-S (S-corp) or form 1120 (C-corp). Basically, you need to show a lender that your business receives money and has expenses, Rodriquez says.
Two months of bank statements
Your lender will want to see two months of bank statements to show that you can cover closing costs and down payments.
Two recent invoices
Two recent invoices proves that your business is still operating.
License verifications
Depending on the type of business you run, lenders may need to verify licenses with the state.
How to improve your chances of getting a mortgage when self-employed
In addition to making sure you have the required paperwork for the bank and have been self-employed for at least two years, there are a number of other things you can do to boost your chances of getting a mortgage loan.
Provide letters from clients or employees
Letters from clients or employers establishing an intent to continue working with you may help show a lender you’re less of a credit risk.
Increase your cash reserves
It helps to have a lot of cash on hand. Because the irregular income of self-employed people can make banks nervous, you’ll want to show them that you can make the mortgage payments even without that income coming in. Try to have a year’s worth of mortgage payments in a savings account.
Rodriguez points out that the need for recent bank statements and invoices that prove your business still exists are part of COVID protocols that are still in place. “Lenders need to know whether your business is steady, decreasing or increasing by doing this cash flow analysis”.
Be self-employed for two or more years
One of the biggest reasons self-employed mortgages get denied is not having enough self-employment work history. Typically, lenders like to know you’ve been self-employed for two years or more.
What if I don’t qualify for a self-employed mortgage?
If you’re self-employed and looking for alternative ways to secure a mortgage, you might consider buying a house with a partner. Find someone who has a W2 and steady income. Whether a friend or relative, you need to have a high level of trust with each other, and you’ve got to lay the ground rules for shared ownership. Working with a good real estate agent and an attorney can help to keep everyone on the same page.
Stay the course. Even if you’ve been renting for years and are ready to buy a house, the last thing you want to do is take on a mortgage that will overwhelm you. Speak with a financial advisor or legal professional to get expert advice for your personal situation.