Self-Employed? Use This Type of Loan to Secure Your Mortgage

Now really isn't an ideal time for anyone to buy a home. We're still stuck with stubbornly high mortgage rates -- as of this writing, the average rate for a 30-year fixed-rate mortgage loan is 6.71%, per Freddie Mac. And to make matters worse, the supply of homes to buy is still lacking, meaning you're likely to find a lot of competition if you're trying to buy.

If you're a self-employed borrower, the troubles might not end there. Getting a mortgage when you work for yourself is more complicated than if you have a traditional job, and there are a lot more hoops to jump through. Let's take a look at a type of loan that can help, as well as some tips to help you get in the best position possible to buy your dream home.

How do you qualify for a mortgage if you're self-employed?

If you're a small business owner, full-time freelancer, or are otherwise self-employed, you'll be asked to provide a lot of documentation to prove your earnings if you opt for a conventional or government-backed mortgage loan. Plus, instant online loan pre-approval might not work for you.

You'll likely be asked to supply 1099s, bank statements, and a few years of tax returns. It's also best if you have at least two years of self-employment under your belt, so you can make a case that your income has been steady and will remain so going forward. Remember, a mortgage lender needs to see that you'll be able to pay back the loan you're taking out, which will likely be the largest amount of money you've ever borrowed.

A possible solution? Bank statement loans

If you're lacking that steady two years of self-employment, your income varies widely, or you have another more complicated income situation, you may want to seek out a lender that deals in stated income mortgage loans. These include bank statement loans. For a bank statement loan, you'll be asked to provide 12 to 24 months' worth of bank statements. This will give the lender a fuller picture of your finances.

These loans are likely to be more expensive than a more standard mortgage, though, with higher interest rates, so it's especially important to shop around to get the best possible rate you qualify for.

Tips for buying successfully while self-employed

Regardless of whether you opt to run the gauntlet of documentation you'll need for a conventional mortgage loan, or decide to shop around for a lender that offers bank statement loans, there are a few moves you can make to ensure your home-buying adventure is as painless as possible.

• Build your credit: The higher your credit score, the more attractive you will be as a borrower, regardless of your income situation. A high credit score shows lenders that you manage credit responsibly. So pay off debt, go through your credit report for errors, and renew your commitment to making on-time payments.
• Save a robust down payment: The more money you can put down on a home loan, the less of a risk you'll be to a lender. Plus, you'll save money on mortgage insurance if you can put at least 20% down.
• Shop around (and shop around some more): If you have a unique employment situation, you can likely expect a wider range of mortgage quotes when you look into pre-approvals. So talk to as many lenders as you can, and consider asking self-employed friends who own homes which lenders they used.

Buying a home isn't easy for anyone these days, and it's likely to be even harder if you don't have traditional W-2 income. Consider a bank statement loan and follow the above tips to make the process as smooth as possible.