Absolutely! While there are certain nuances that can make purchasing a home slightly more challenging for self-employed individuals to obtain a mortgage compared to traditionally employed individuals, it’s definitely possible. Lenders typically assess your financial stability and ability to repay the loan. The key lies in demonstrating your income and financial health convincingly.

Can I Get a Mortgage as a Self-Employed Person?

Absolutely! While it may be slightly more challenging for self-employed individuals to obtain a mortgage compared to traditionally employed individuals, it’s definitely possible. Lenders typically assess your financial stability and ability to repay the loan. The key lies in demonstrating your income and financial health convincingly.

Exploring Mortgage Options

There are many types of mortgage options available to self-employed homebuyers looking to purchase a primary residence. Let’s take a look at two popular choices:

1. Conventional Loans

Conventional loans are offered by banks, credit unions, and private lenders. These loans usually require a higher credit score and a more detailed financial history. However, with a solid credit score and a year of self-employed income on federal tax returns, you can qualify for a conventional mortgage. Prepare to provide thorough documentation of your finances, including tax returns and bank statements.

2. Bank Statement Loans

Bank statement loans are an alternative option for self-employed individuals. These loans consider your bank statements, usually covering the past 12 to 24 months, to determine your income. The lender reviews your average monthly deposits to estimate your earnings. Bank statement loans can be a great solution if you have a steady income but limited tax returns to show.

3. P&L Loans

Similar to Bank Statement loans, these are an alternative financing option for self-employed individual. A CPA must fill out a profit and loss statement for the business, and this is used to understand the monthly net operating income of the business.

Navigating Credit Scores

Credit scores play a crucial role in mortgage approval. Lenders use your credit score to assess your creditworthiness and determine the interest rate you’ll receive. While requirements may vary among lenders, aiming for a credit score of 620 or higher is generally recommended for conventional loans. However, some loan programs, such as FHA loans, may accept lower credit scores, making them more accessible for self-employed homebuyers.

Unraveling FHA Loans

FHA loans, insured by the Federal Housing Administration, are designed to help individuals with limited credit history or lower credit scores. These loans offer more flexibility and require a smaller down payment compared to conventional loans. If you’re a self-employed individual with a credit report score on the lower end, exploring FHA loan options could be a smart move, however they will required your self-employment earnings to be averaged over the last two years of filed tax returns.

Highlighting Income Documentation

One of the biggest hurdles for self-employed individuals is proving their income. Traditional employees can rely on W-2 forms, but self-employed individuals must provide alternative documentation. Here are a few ways to demonstrate your income:

  • Tax Returns: Provide at least one year of complete tax returns, including all relevant schedules and forms.
  • Profit and Loss Statements: These statements summarize your business’s income and expenses, providing a clear picture of your financial health.
  • Bank Statements: Provide several months of personal and business bank statements to illustrate your cash flow and income consistency.

Can I Get a Mortgage if I’ve Been Self-Employed for Less Than a Year?

While having at least one year of self-employed income is generally preferred, it’s important to note that you are sometimes able to purchase with a shorter self-employment history. This is usually only true if you are earning MORE net income and are in the exact same industry and preforming a very similar role to your prior W2 job.

When applying for a mortgage with less than one year of self-employment, it’s crucial to consult with multiple lenders to explore your options. Each lender has different guidelines and criteria for self-employed borrowers, and some may have more flexibility in their requirements.

Here are a few factors that are usually considered when evaluating mortgage applications from self-employed individuals with less than one year of income:

  1. Previous Employment History: Lenders will take into account your employment history before you became self-employed. If you have a solid work history with a consistent W2 income that was slightly less than you are earning now, this will show favorably on your application.
  2. Financial Stability: Lenders want to ensure that you have a stable financial situation. They may assess your personal savings, investments, and other assets to evaluate your ability to handle mortgage payments.
  3. Industry Experience: You must have been in the same industry and performing the same job functions for the last two years. Lenders will consider expertise and track record as indicators of future success.
  4. Consistent Income: Even with less than a year of self-employment, demonstrating a consistent income stream is vital. Providing bank statements and other financial documents that show regular deposits and consistent cash flow can strengthen your case.
  5. Strong Credit Profile: A good credit score is crucial for any mortgage application. If you have a strong credit history, it can compensate for the shorter self-employment period and increase your chances of approval.

Remember, each lender has different lending policies, so it’s essential to research and reach out to various institutions to understand their specific requirements. Working with a mortgage broker who specializes in self-employed individuals can also be beneficial, as they have access to a wide range of lenders and can help you find the best mortgage options based on your unique circumstances.

While it may be more challenging to secure a mortgage with less than one year of self-employed income, it’s not impossible. By demonstrating financial stability, maintaining good credit, and exploring multiple lending options, you can increase your chances of obtaining the mortgage you need to achieve your homeownership goals.

Will I Need to Provide More Documentation as a Self-Employed Borrower?

Yes, as a self-employed borrower, you can expect to provide more documentation compared to traditionally employed individuals. Lenders require this additional documentation to verify your income and assess your financial stability. Here are the key documents you should be prepared to provide:

  1. Tax Returns: Lenders typically require at least one to two years of complete personal and business tax returns. This includes all relevant schedules and forms such as Schedule C (Profit or Loss from Business) or Schedule K-1 (Partner’s Share of Income). Tax returns help lenders evaluate your income consistency and determine your ability to repay the mortgage.
  2. Bank Statements: Providing several months of personal and business bank statements is crucial. These statements serve as evidence of your income deposits, business revenue, and personal financial habits. Lenders will closely review these statements to assess your cash flow, financial stability, and the consistency of your income.
  3. Profit and Loss Statements: Profit and loss statements summarize your business’s income and expenses over a specific period. They provide a snapshot of your business’s financial health and can help lenders understand the profitability and stability of your self-employment income. Prepare these statements for the past year, or ideally, for the same period covered by your tax returns.
  4. Business Registration Documents: Lenders may require proof of your business registration or licensing. This can include documents such as Articles of Incorporation, a business license, or a DBA (Doing Business As) certificate. These documents verify the legal status and legitimacy of your business.
  5. Business Contracts and Invoices: If applicable, you may need to provide copies of business contracts, business expenses, invoices, or client agreements. These documents can demonstrate a consistent client base and a predictable stream of income, further supporting your mortgage application.
  6. CPA Letter or Verification: Some lenders may request a letter from a Certified Public Accountant (CPA) or other qualified professionals to verify your self-employment income. The letter typically confirms the accuracy of your financial statements and attests to the stability of your business.

While the documentation requirements may seem extensive, they are necessary for lenders to evaluate your income and determine your eligibility for a mortgage. It’s essential to be organized and provide complete and accurate information to facilitate the mortgage application process.

Questions? Contact JVM Lending!

At JVM Lending, we understand the unique challenges faced by self-employed individuals when it comes to securing a mortgage. We are mortgage experts, specializing in helping self-employed borrowers achieve their homeownership dreams. If you have any questions or need guidance on getting a mortgage as a self-employed person, we’re here to help. Our team of experienced mortgage analysts is well-versed in the intricacies of self-employed mortgages and can provide tailored solutions to meet your specific needs. Don’t let the complexities of the mortgage process hold you back. Reach out to JVM Lending today for expert advice and exceptional service.

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