2019 Self Employed Mortgage Guide and FAQ

BY Ally Abernathy

self employed mortgage loans

5 minute read

Being self employed is great, you make your own hours and are your own boss.

The down side of being self employed is the difficulty it creates when applying for a mortgage.

In this article we have a couple expert tips to help you know what to expect as a self-employed borrower.

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Prepare your Documentation

Garrett Ball, President, Secure Medicare Solutions

The most important thing a self-employed person needs to know about applying for a mortgage is to be prepared to provide plenty of documentation for their income. The “bar” for qualifying for a mortgage can be a little more challenging when self-employed because the income records may not be as straight-forward as they are with a W2 employee.

Instead of just providing tax records, as a self-employed borrower, I was also required to provide 1099s from anyone who paid me for the last two years in order to document my stated income. Also, I was required to provide records of expenses and accounting records, so that the lenders could verify my net income after expenses.

In my experience, I was able to successfully obtain two mortgages as a self-employed person. The process did take longer than a traditional employee obtaining a mortgage, but it is certainly achievable – it just helps if you go into the process expecting it to take a little longer and expecting that the borrower will request a tremendous amount of documentation from you.

Be Incredibly Organized

Jim Angleton, President, Aegis FinServ Corp

“Having all of your Documentation to support your income, cash-flows, free online credit report + FICO Score, copy of bank/persona/business statement year end is important and present yourself in best possible light. Sometimes a Bank Consultant can help you navigate the arduous task for making application for a home loan.

Check the following: obtain an online free credit report and make sure it is 100% accurate as you know it to be, google your name and see if there is any adverse, fake, incorrect information about you, get a letter from your Tax Preparer indicating the Gross and Net Annual Income you have made over the past (up to ) 3 years in business.

Yes, you will need copies of 1040’s and 1120’s but a letter from the preparer will help the underwriter and credit processor to see what you are representing as income for their decision making underwriting.”

Maximize your Credit Scores

Ally Abernathy, Editor, The Lenders Network

Ensuring your credit score is as high as possible can help your chances of getting approved as a self employed borrower. The higher your FICO score is the lower risk you present to a potential lender.

Start by obtaining a copy of your free credit report and scores. You can get a copy of your credit report for free at www.annualcreditreport.com. You can obtain your free scores from Credit Karma and Credit Sesame. While these credit scores will not be the same scores a lender looks at it will give you a good idea of where you stand credit wise.

If you have any open credit cards then you should pay down the balances. The amount of available credit you have used up is called your credit utilization ratio. The lower this ratio is the higher your credit score will be.

Credit utilization accounts for 30% of your overall credit rating. Only your payment history has a bigger impact on your FICO credit score. Try to keep your credit card balances below 15% of the credit limit.

Highlight compensating factors that reduce risk to your mortgage lender

Lending to a self employed borrower is sometimes considered a risky loan. In order to help offset the risk that comes with being self employed your loan application should have at least a couple of factors that compensate and reduce risk.

Compensating factors

  • High income, having a low debt-to-income ratio
  • Large down payment, low loan-to-value ratio
  • High credit score (700+)
  • Established positive credit history
  • Large cash reserves
  • Established self employment history with sufficient income
  • Low amount of consumer debt (credit card, student loans, auto loans)

Self Employed Mortgage FAQ

Are there special types of mortgage programs for self employed borrowers?

Angleton states that “there are several and the first question the borrower must realize/know..about how long will they live in this home? If answer is less than 10 years, it makes perfect sense to obtain a 10 ARM / 30 Year Amortization Loan.

Another is a Self Employed, full documentation loan and 25% cash down. The second is the gold standard for easier underwriting as the borrower acknowledges they will provide up to 25% cash down at the time of settlement and the loan will be 75% Loan to Purchase Price…not ‘Value’.

The 10 yr ARM requires no less than 5% cash down and the underwriting is much more difficult to overcome. You can expect many questions, proof of information and more than 90 days of processing.”

Are there still no income verification loans?

Stated income loans used to be widely available before the housing market crash. However, since the crash stated income loans are very rare. There are still some lenders who may provide them but they require excellent credit and very high down payments.

What is a no doc mortgage loan?

No doc mortgage loans are another type of loan that has disappeared. No-doc loans are now illegal because they violate laws stating that lenders must document and verify a borrower’s ability to make the mortgage payments.

What is a hard money loan and should I get one?

Hard money loans are typically for investment properties. A hard money lender will lend up to 70% of the after repaired value of a property. Hard money loans come with an interest only repayment term and have high interest rates in the neighborhood of 9%-14%. Hard money loans are not recommended for an owner occupied borrower.

Do mortgage companies verify tax returns with the IRS?

Yes. Tax returns are always verified by mortgage lenders by requesting a tax-return transcript from the IRS prior to funding the loan.

What are portfolio loans?

A portfolio mortgage loan is a mortgage that is funded and services by the same lender. Typically a lender funds a loan then sells the mortgage to a third party such as Fannie Mae or Freddie Mac. A portfolio loan is held onto by the issuing lender and becomes a part of their investment portfolio.

Do I need a special mortgage if I’m self employed?

Not necessarily. FHA, VA, USDA, 203k, Conventional and Jumbo loans are all available to self employed borrowers as long as you meet the requirements.

The Bottom Line…

When it comes to getting a self employed mortgage loan preparation is key. There are many documents a loan officer will need in order to verify income for self-employed borrowers. By having your last 3 years of tax returns for your personal and business, along with P&L statements, W2’s, bank statements, etc. you can help speed up the process of getting approved. It is a good idea to get pre-approved for a mortgage before you start house hunting.

Are you self employed and want to see if you qualify for a mortgage?

Speak to our mortgage lenders today