Self-employment has a lot of benefits for the 16 million that fall into this category : a flexible work schedule, the ability to basically determine your own income, However, there’s also challenges when you are trying to qualify for a mortgage to buy a home.

If you’re self-employed and seeking to purchase a home, condo, townhome or multi-unit property, you’ll go through the same initial steps as a salaried employee such as completing a loan application, having your credit pulled, a review of your assets, your income, and overall debt picture. The one big difference is how mortgage lenders verify a self-employed borrower’s income.

Self employed loan documents you’ll need

Your lender will ask for the following if you are self-employed:
• Personal tax returns (copies of W-2s if you’re paid by your corporation)
• Copies of IRS form Schedule C, Form 1120S or K-1, according to the structure of your business

Once this documentation is provided, the lender will average the past two years business income based on their guidelines. Here is an example; if you earned $78,750 in 2020, $117,250 in 2021, the lender will determine your effective annual income to be $98,000, or $8,166 per month ($78,750 + $117,250, divided by 24 months).

If you are a sole proprietor and don’t have a corporation or partnership, form 1120 and/or K-1’s are not applicable. Whatever the case, while your business could make X amount, your taxable income on your tax returns is likely a lot lower than your gross earnings or sales.

The problem is lenders use your taxable income to determine the ability to afford a home. So whether you’re seeking to qualify for a mortgage as an owner of a corporation or as a 1099 independent contractor, lenders analyze your earnings differently.

Qualifying For A Mortgage When You’re Self-Employed

If your expense write-offs make your qualifying income a hurdle, look into these two no tax return special products, the bank statement mortgage for all types of business owners or the 1099 mortgage for independent contractors.

What Documents Do You Need To Provide?

To begin with, you’ll need verify self-employment for the last two years. The following are examples of documents a lender may request to prove your employment.

Employment Verification
Proof that you’re self-employed can be verified from the following:
• A copy of your state or business license
• A state or county business filing for a fictitious business name, corporation, or LLC
• A letter from a licensed certified public accountant (CPA)
• A professional organization that can confirm to your membership

What if you’ve been self-employed less than two years?
Basically, your business needs to be active for at least 12 consecutive months and your most recent previous employment will need to be verified. Sometimes, your lender will do a deep dive into your education and training to establish that your self-employment or business can use that as a two year history.

Another way is if new self-employment status is in the same industry as your most recent employment, and your income will be the same (or more).

Tips for Improving Mortgage Approval for the Self-Employed
When you are self-employed, there are some additional strategies you can do to strengthen your loan application. Here are a few tips you can use:

  1. Register your business, apply for the proper licenses, and/or get a CPA
  2. Pay your bills on time
  3. Pay down as much debt as possible before applying for a mortgage.
  4. Don’t apply for new credit
  5. Keep separate business and personal bank accounts if possible.
  6. Maintain clean and accurate business records.
  7. Don’t take large tax deductions of you want to provide tax returns for qualifying
Updated: January 21, 2022