Being self-employed does not prevent you from qualifying for a mortgage. Business owners, freelancers, independent contractors, and other self-employed professionals can purchase homes using conventional, FHA, and other mortgage programs when they meet the applicable requirements.
The biggest difference is often how your income is documented and analyzed. Preparing your financial records before applying can make the mortgage process easier to navigate.
Understand How Lenders Evaluate Self-Employment Income
Mortgage lenders need to determine whether your qualifying income is stable and likely to continue. For conventional financing through Fannie Mae guidelines, lenders generally review a two-year history of prior earnings for a self-employed borrower.
There are exceptions. Fannie Mae may consider a borrower with less than two years of self-employment when there is at least 12 months of income from the current business and documentation supports previous income at the same or a higher level in a similar field or occupation.
FHA guidelines generally allow self-employment income when the borrower has been self-employed for at least two years. Someone with one to two years of self-employment may be considered when there is an appropriate prior employment history in the same or a related occupation.
Get Your Tax Returns and Business Records Organized
Self-employed borrowers should expect the lender to take a closer look at their financial records. Depending on the mortgage program and circumstances, documentation can include personal and business federal tax returns, applicable schedules, tax transcripts, profit and loss statements, balance sheets, and verification that the business is operating.
The exact documents required depend on your business structure, ownership percentage, income history, mortgage program, and underwriting findings.
Know That Business Revenue Is Not the Same as Qualifying Income
A common misunderstanding is that lenders simply use gross business revenue to determine how much mortgage a self-employed borrower can afford. Mortgage underwriting generally requires an analysis of income after considering applicable business expenses and other adjustments permitted under the loan program.
This is why the income used for mortgage qualification can differ significantly from the revenue your business generates.
Be Careful With Tax Deductions Before Applying
Legitimate business deductions can reduce taxable income, but lower reported income can also affect the income available for mortgage qualification. Some noncash expenses may receive specific underwriting adjustments, but borrowers should not assume every deduction will simply be added back.
Before making tax decisions based on a future home purchase, consider speaking with a qualified tax professional and mortgage professional. Tax planning and mortgage underwriting have different objectives.
Keep Personal and Business Finances Well Documented
Clear financial records can make it easier to document income, assets, and the source of funds needed for your purchase. Avoid unexplained transfers or deposits, and maintain records showing where funds for the down payment, closing costs, and reserves came from.
If you plan to use business assets for your home purchase, additional analysis may be necessary to determine whether withdrawing those funds could negatively affect the business.
Review Your Credit, Debts, and Savings
Self-employment is only one part of mortgage qualification. Lenders may also consider your credit history, monthly debts, assets, available funds, property, and other requirements of the mortgage program.
Continue paying bills on time and avoid taking on unnecessary debt before applying. Maintaining additional savings can also help with your down payment, closing costs, reserves, and unexpected homeownership expenses.
Explore Mortgage Options for Self-Employed Borrowers
Self-employed borrowers are not limited to one type of mortgage. Depending on eligibility, conventional, FHA, VA, USDA, and other financing options may be available.
Some borrowers may also explore non-QM mortgages that use alternative methods of documenting income, such as certain bank statement programs. These programs have their own underwriting requirements and may have different rates, down payments, reserves, or fees than traditional mortgage options.
Prepare Early for Your Mortgage Application
If you are self-employed and planning to buy a home, starting early gives you time to organize financial documents, understand how your income may be calculated, review your credit, and compare mortgage programs.
Loan Wolf Lending can help Florida self-employed professionals explore mortgage options and understand the documentation that may be needed for their financial situation. Call 754-755-3075 to discuss your homebuying plans.