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Is it hard to get a mortgage when self-employed?

If you’re self-employed and eyeing that dream home, you’ve probably asked this very question. The good news, though, is that while getting a mortgage in this scenario may involve a few extra steps, it’s absolutely doable.

Each year, countless self-employed individuals successfully purchase homes. Operating your own business comes with the perk of managing your income, but it also means earnings can vary month by month. Understandably, lenders might approach your application with a tad more caution, scrutinizing both your income and credit history.

However, despite the potential for a more thorough underwriting process, rest assured that self-employed individuals can indeed qualify for a mortgage, albeit with a bit of patience. Here’s how to get a mortgage when self-employed. 

1. Have Two Years of Business Tax Returns

Instead, you’ll typically need to furnish your business tax returns from the past two years, demonstrating steady or increasing income over that period.

Be aware, a significant income drop between years can raise concerns for lenders, potentially affecting your qualification amount. Typically, lenders will average your income over those two years to assess your eligibility.

Some banks may consider applicants with just one year of self-employment, provided they have prior industry experience and sufficient income to support mortgage payments.

2. Limit Your Number of Business Write-Offs

A competent tax preparer will look for as many tax deductions as possible to help you save money. The problem is that too many deductions reduce your income on paper, which can also reduce your qualifying amount when applying for a home loan. 

Now, mortgage lenders can add back certain deductions to your income, such as depreciation and a percentage of a mileage write-off. But even with these additions, your income might not be enough to qualify for a particular mortgage amount. 

Therefore, if you’re thinking about getting a mortgage as a self-employed borrower, limit your number of tax deductions for the next couple of years. 

3. Prepare a Profit and Loss Statement

Keep in mind, too, that if you apply for a home loan after the first quarter of a new year, your lender may require a year-to-date profit and loss statement.

This statement, often abbreviated as P&L, is a financial document that summarizes the revenues, costs, and expenses incurred by a business over a specific period, typically a month, quarter, or year.

For a self-employed individual, this statement details the income earned and the expenses incurred in running their business during that time frame. It helps lenders gauge the consistency of your income compared to the previous year’s tax return.

4. Make a Larger Down Payment

Depending on the type of mortgage loan, you might only need a down payment between 3% and 5% of the purchase price. However, if too many business write-offs reduce your qualifying amount, a larger down payment might compensate for this. 

**Pro Tip: Never drain your bank account on a home purchase. 

Always maintain a cash reserve for emergencies, at least two to three months worth of mortgage payments, if possible.

5. Choose the Right Mortgage Lender

Find a lender that’s familiar with self-employment income. These lenders might also have products tailored specifically to you, such as portfolio loans. 

These are loans serviced by the lender, and since they aren’t sold on the secondary market, there’s more flexibility and leeway regarding eligibility requirements. 

Bottom line: Don’t believe anyone who says you can’t get a mortgage when self-employed. The process might not be as simple or as fast as a traditional worker. But with advanced preparation and an understanding of lender guidelines, a home loan is within your reach.

FAQ on Getting a mortgage when self-employed

How hard is it to get a mortgage if you’re self-employed?

Getting a mortgage while self-employed can be challenging but not impossible. Lenders typically scrutinize income and credit more closely due to fluctuating earnings. Self-employed individuals need to provide tax returns from the past two years to demonstrate income stability. However, with proper documentation and a consistent income, securing a mortgage is feasible, though it may require more effort and patience than for traditional employees.

What is the best mortgage for self-employed people?

The best mortgage for self-employed individuals depends on their financial situation and preferences. Generally, loans with flexible qualification criteria can be suitable. However, these often come with higher interest rates. Working with a knowledgeable mortgage broker can help find the most suitable option, considering factors like credit score, income stability, and down payment capability.

Can I buy a house if I just became self-employed?

Buying a house shortly after becoming self-employed is possible but may present challenges. Lenders typically prefer to see a history of stable income, often spanning two years, before approving a mortgage. However, if you have prior experience in your field and can demonstrate sufficient income to support mortgage payments, some lenders may consider your application.