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A growing number of Americans are self-employed or working in the gig economy. If you're one of them and considering purchasing a home, you might be wondering how to get a mortgage when self-employed.
The bad news: Securing a home loan is challenging when you work for yourself. That's because lenders may not count all your income.
But there's good news, too. Mortgages for self-employed borrowers do exist. And by following a few simple steps, you can improve your chances of qualifying for one. Below, we'll go over how to get a mortgage when you're self-employed.
If you're searching for mortgages for self-employed individuals -- whether to purchase a home or to refinance your existing housing debt -- follow these steps.
One of the trickiest parts of figuring out how to get a mortgage when self-employed? Not all of your income necessarily counts.
Generally, lenders look at net income on Schedule C of your personal tax returns if you don't file a separate tax return for your business. In some cases, lenders add back in income from certain tax deductions, such as for business use of your home, or depreciation. But most deductions can't be added back in. Your net income determines whether you qualify.
If your business files separate tax returns and you receive a portion of company profits or losses, your lender may also want to see K-1 tax forms. Lenders look at net profit. If you aren't 100% owner of the business, only your portion of the company's income counts in determining if you qualify for a loan. Lenders usually add back in depreciation, but most other tax deductions and any outstanding business debt obligations count against your income.
If your business income hasn't been steady over the past several years, lenders usually use a two-year average, or, if your business income is declining, give you credit only for the most recent year's income.
That means if you made $150,000 two years ago but $100,000 last year, the lender is likely to count at most $125,000 -- or likely just $100,000 of your earnings -- in deciding whether to give you a loan, and what amount you can borrow.
Mortgages for self-employed borrowers can seem more complex due to the amount of income verification needed. But if you can gather all the necessary paperwork, you should be able to verify your self-employed income.
If you do not have two years of steady self-employment income, getting a mortgage when self-employed is challenging.
A few lenders who are very experienced with self-employed home loan borrowers may be willing to count some of your earnings from self-employment. You'll have a better chance of qualifying if you can show you worked in the same industry successfully for a year or two before starting your own business.
If you're not sure how to get approved for a mortgage when self-employed, try these four key steps to maximize your chances.
Self-employed and need a credit card? Check out The Ascent's guide to the best credit cards for self-employed individuals and pick the card that's best for you.
Most buyers interested in getting a mortgage when self-employed do best with the same kinds of loans as other borrowers.
This could mean conventional mortgages not backed by government lenders. Or you could consider FHA, VA, or USDA loans if you want a government-insured mortgage. You can learn more about loan types in our beginner's guide to home loans and more about the best FHA lenders when you're ready to get started.
There are some kinds of mortgages that require very little documentation -- although they're much harder to come by now, due to the subprime mortgage crisis. These include:
There's no question that self-employed borrowers face added challenges. Answering the question of how to get a mortgage when you're self-employed isn't simple. But local banks, national banks, online lenders, and credit unions may all be willing to offer you a loan if you're a well-qualified borrower with proof of steady income.
To find mortgages for self-employed borrowers, start by talking to lenders you already work with, or those who advertise that they're willing to look at non-traditional income. Aim to get pre-qualified by several mortgage lenders. Compare their offers; see how they align with current mortgage rates; and home in on the ones that give you the best deal on a self-employed home loan.
By putting in the effort, you can find the right mortgage for you, and your dream of becoming a homeowner can come true.
Here are some other questions we've answered:
If you want to uncover more about the best mortgage lenders for low rates and fees, our experts have created a shortlist of the top mortgage companies. Some of our experts have even used these lenders themselves to cut their costs.
To get a self-employed home loan, apply after earning at least two years of steady income while working for yourself. Raise your credit score and put down the largest down payment possible. Make sure to shop around with mortgage loan providers to find one who'll approve you for an affordable loan without income from traditional sources.
Generally, lenders look at your net income after reviewing tax forms such as your Schedule C or K-1s. You may have to provide profit-and-loss statements, too. Lenders usually average your income over two years. However, if your income is declining, they may count only the lower amount of income you earned in the most recent year.
Almost all lenders make loans to self-employed borrowers, provided they are well qualified. However, some banks, online lenders, or credit unions have more experience working with buyers who do not have income from traditional sources.
Shop around for a lender catering to those who are self-employed, or ask your current bank or credit union if they can help. They may be more willing to approve your loan because of your established relationship.
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