How to Qualify for a Mortgage as a Self-Employed Professional

Qualifying for a mortgage if you are self-employed can be more challenging than if you are a W-2 employee, but that doesn’t mean you’re completely out of luck. Here is a look at how you can maximize your chances of approval when applying for a mortgage as a self-employed professional.

What You Need to Know to Qualify for a Mortgage as a Self-Employed Professional

What is Considered Self-Employed:

A person is considered self-employed if they do not receive a traditional salary. This could be because they own a business, or they are an independent contractor.

A lender will consider you self-employed if you meet the following conditions:

  • You do not receive a W-2 tax form
  • You receive a 1099 tax form
  • You are a contractor or freelancer
  • You own 25% or more of a business
  • The majority of your income is from dividends and interest

If you own less than 25% of a business, you are not considered self-employed in the eyes of a mortgage lender. Or, if you have a side business or contractor job but you don’t need it to qualify for the loan, the lender may disregard it on the application.

Disadvantages of Being Self-Employed

Although being self-employed can often come with fringe benefits like scheduling flexibility or the ability to work from anywhere, it has its disadvantages when applying for a home loan.

W-2 employees are typically seen as safer borrowers because they receive consistent income from a stable business. Plus, their income is often easier for the lender to verify and requires less paperwork to apply.

Self-employed professionals often have multiple streams of income or ways they accept payment, which can complicate the mortgage application process. Plus, they tend to reduce their taxable income by writing off business expenses, making it more difficult to decipher how much disposable income they truly have.

But if you are willing to take the necessary steps to verify your credentials to the lender, you can still be approved at a good rate if you are self-employed.

Tips for Improving Your Chances of Approval as a Self-Employed Professional

There are a few simple ways to increase your chances of being approved for a home loan if you are self-employed. But, it’s important to take stock of your financial situation before approaching a lender. Take the following steps to improve your financial outlook before beginning the application process, so you won’t run the risk of being denied.

Work on your Credit Score: Showing that you have a proven track record of paying bills on time and haven’t had any major financial issues like a bankruptcy or tax lien will certainly increase your chances of approval. The higher your credit score, the more impressive it will look to lenders, so anything you can do to boost your score will pay off.

Save Money: Having a significant cash reserve shows that you are financially disciplined and prepared for emergencies. That way, if you lose an important client or go through a seasonal decline in your business, you won’t be scrambling to pay the mortgage. You may also want to offer a larger down payment to offset some of the risks to the lender, which you’ll need a significant sum of cash on hand to do.

Pay Off as Much Debt as Possible: The less debt you have when you apply, the better – especially consumer debt. This includes credit cards, car loans, student loans, and anything other debt owed due to purchasing goods for individual or household consumption. Having a low debt-to-income ratio will make you appear more fiscally responsible to a lender and increase your chances of approval.

Gather the Necessary Documents: One of the hardest parts of getting approved for a loan if you’re self-employed is being able to prove your income. The more work the lender has to do on their end, the more likely you will be denied. So gathering and organizing the necessary paperwork to tell an accurate story of your financial situation will go a long way toward helping your chances of approval.

Common paperwork requested includes:

  • tax returns
  • bank statements
  • profit and loss statements
  • list of debts and assets
  • additional sources of income
  • proof of employment or the existence of your business.

If you follow these simple steps, you shouldn’t have a problem qualifying for a mortgage. Ultimately, lenders want to be sure that you are financially stable and able to fulfill the financial obligations of the loan. As long as you do your part to prove your creditworthiness, you shouldn’t have any issues.

About US

Cape Coral Mortgage has been in Florida for 20 years with over 100 years of combined experience in the mortgage industry. Our team has vast experience in all phases of mortgage lending.

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