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Qualifying for a Self-Employed Mortgage

Qualifying for a Self-Employed Mortgage
Betsalel Cohen
UpdatedMay 14, 2024
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    4 min read

Self-Employed? Learn about Getting a Mortgage

Being self-employed has its benefits - you choose the hours and you are the boss. However, when it comes to getting a mortgage, you face more hurdles. You have to provide more paperwork than an employee and must work harder to prove that you can afford the mortgage.

If you are self-employed, it is important to understand:

  • Why it is harder for self-employed to get a mortgage
  • What a lender looks for in a self-employed applicant
  • Adjustments made to your income

Getting properly prepared to apply for a mortgage is good advice for every borrower. You need to work on improving your credit score, keeping a clean credit history, lowering your debt to income ratio, and saving money for a down payment. Make sure that you prepare to qualify for a mortgage.

Self-employed: Harder to get a mortgage?

It is harder for a self-employed borrower to get a mortgage. Not only do self-employed applicants have to provide more information and documents, but those documents are much harder to read and correctly interpret. Here are some of the reasons lenders have a harder time giving a self-employed applicant a mortgage:

  • Income is harder to predict
  • Business debt can also be a personal liability
  • Small businesses fail at a high rate
  • It is costlier and more difficult to underwrite the loan.

Lenders determine the income figure they will use, after reviewing your tax returns and financial statements. Your attempt to lower your taxes (less income and higher expenses) can definitely conflict with lender's debt-to-income requirements. You may only qualify for a smaller mortgage than you anticipated getting.

What is a Lender Looking for in a Self-employed Borrower?

In order to qualify for a mortgage. the most important factor you need to show the lender is that you have the ability to make your monthly payments on time.

Here are some of the main issues a lender will look at when determining if a self-employed borrower can afford to repay the loan:

  1. Income: Is your income stable? How likely is it to continue and at what levels? The lender will look to see if there are any significant changes, or gaps in your income history.
  2. Earnings: What are the trends and sources of your earnings? Keep in mind that lenders will look to see if there are any significant changes in your income. In general, they will not average your income over the last two year. Instead they will take the lower of the 2-year average or last-year income.
  3. Asset Liquidation: Lenders will look to see if you are liquidating any assets that might lower your income flow.
  4. Documentation: Lenders require more documentation including 2 years of signed federal tax returns and all applicable schedules.

Your Self-employed income: What counts?

While wag- earners rely on their monthly salary, self-employed borrowers rely on their cash flow. The businesses profit and loss depends on a number of expenses, some of which are bookkeeping expenses.

If you are self-employed and apply for a mortgage your lender will carefully examine your 1040 tax returns and the Schedule C attachment. The lender makes certain adjustments to your income and adds back these expenses to increase your income:

  • Depreciation
  • Depletion
  • Business Use of Home
  • Amortization/Casualty Loss

Any nonrecurring income that is not part of the regular business operations will be deducted from your income.

A self-employed mortgage applicant should check with their accountant (or certified tax preparer) to get a full set of tax returns. Make sure that you understand the amount of income you have and the stability of recurring income.

Bills Action Plan

If you are self-employed and looking to buy a home or refinance a mortgage make sure that you:

  1. Save up funds and don't deplete business funds that may hurt your income.
  2. Work closely with your accountant to get together a complete package of two year income sheets.
  3. Work with the lender to get an estimate of your monthly income.
  4. Like any borrower work on improving your credit, lowering your debt load, and building up a strong down payment.
Quick Tip

Get a mortgage quote from a mortgage provider.

Mortgage market: a pulse check

No surprise that mortgage rates fluctuate. If you are thinking about purchasing a home or maybe considering refinancing your current mortgage, then you want to be up to date on mortgage rates.

Mortgage rates April 10, 2024
According to Freddie Mac, the 30-year mortgage rate for the week of April 10, 2024 stands at 6.88%. This 6 basis points increase from the previous week's rate.
Additionally, Freddie Mac reports that the 15-year mortgage rate for April 10, 2024 is 6.16%, indicating a 10 basis points increase from previous week’s rates.
Note: A basis point is equal to one-hundredth of one percent (0.01%). In numerical terms, if the mortgage rate changes by 20 basis points, it means the rate has changed by 0.20%.

Understanding the impact of mortgage rates on your finances
When it comes to determining your monthly payment, mortgage rates are a key factor to consider. Here are the avergage interest rates (APR) for April 14, 2024 based on Zillow data for borrowers with a high credit score (680-740) in the United States:

  • 30-year conventional loan is 7.09%
  • 15-year conventional loan is 6.29%
    Based on the provided rates, a $279,082 30-year mortgage would result in a monthly payment of $1,874. Alternatively, a 15-year mortgage would require a monthly payment of around $2,399.

Explore your options and secure pre-approval today!
To make your life easier, we highly recommend shopping around for mortgages and getting pre-approved. This will streamline the home-buying or refinancing process and make it a breeze. Ready to get started? Check Out mortgage rates now for the best options available.