How to Get a Mortgage When You’re Self-Employed

Getting a mortgage is a real financial feat, especially with the stringent mortgage lending criteria that borrowers have to meet these days. But securing a home loan as a self-employed entrepreneur is even tougher.

Lenders usually request the typical documents along with loan applications, such as pay stubs, employment letters, and tax receipts. But people who run their own businesses typically don’t have the same type of income information that salaried individuals do. There are no pay stubs from their employers to prove their income.

Further, each year could bring in different revenues, which can make things even more difficult to determine whether or not the borrower will be able to keep up with mortgage payments throughout the years. And if the business is less than a couple of years old, getting a mortgage is even more of a challenge.

That said, getting a mortgage as a self-employed business person isn’t impossible. It might take more work on the part of the borrower, but there are things that business owners can do to ensure their mortgage applications are approved.

Give Your Business Time to Get Established

Most lenders want to see a minimum of two years’ worth of profits in business before they approve a mortgage application. Ideally, the business you run will have been in operation – and profitable – for at least two before applying for a mortgage. Having a short business history will make it more difficult to get approved because lenders might not be as confident that you’ll be able to cover your mortgage payments every month.

If your business is new or is just starting to turn a profit, consider waiting a couple of years before applying so you can prove consistent earnings year after year, which should increase your chances of getting approved for a mortgage.

Keep Business Growing

You should ideally be in business for at least a couple of years to boost your odds of loan approval. But how your business does within this time frame matters. Having a steady income from self-employment is important. And while a little fluctuation here and there might be OK, it should follow an upward trend.

Make Sure Your Credit Score is Strong

Credit scores play a crucial role in mortgage approval. Not only do lenders want to make sure that you have the income to sustain mortgage payments every billing cycle, but they also want to ensure that your track record is clean. If you have a history of missing debt payments, your credit score will reflect these habits.

With a bad credit score, your chances of getting approved for a mortgage are small. If your credit score is currently lagging, take steps to improve it. That includes making bill payments on time, spending no more than 30% of your credit card limit, and avoiding new loan applications.

Keep Cash Reserves

Your cash flow situation might change from one month to the next, but your obligations to pay your bills every month continue. Even if business is a little slow one month, your mortgage payments will still be due and have to be made.

To compensate for potential slow months in business, it’s helpful to have a financial cushion to fall back on. With a decent reserve of cash, you can dip into this account in order to make sure your mortgage payments are covered. Some lenders may even require that you have an emergency fund readily accessible in case of slower times.

Put Forth a Hefty Down Payment

A bigger down payment means a smaller loan amount to apply for. Plus, it gives lenders more assurance that you’ll be able to make your mortgage payments every month. And if other factors of your financial life aren’t that strong, a hefty down payment amount could be what tips the scale in your favor.

Gather Up as Much Documentation as Possible

Home loan applicants need to submit a ton of paperwork to lenders as part of the application process, and the situation for the self-employed is no different. Be prepared to submit as much financial documentation as possible so your lender isn’t left with any gaps. The more documents you can gather up that prove your financial strength, the better.

Generally speaking, you should collect the following info:

  • Two years’ worth of personal and business tax returns
  • Profit and loss statement
  • Statement of assets and liabilities
  • Business bank statements
  • Business license
  • List of debts
  • Any additional income

Pay Down Your Debt

Your credit score is affected by many things, including your debt load. Too much debt could put you at risk of missing payments, which can negatively affect your credit score. On the flip side, your credit score can be improved by paying off as much of your debt as possible. Plus, it will reduce your debt-to-income ratio, which can make it easier for you to get approved for a home loan.

Keep Your Business Records Separate From Personal Finances

It will make things a lot easier for your lender if you have your personal and business financial information and accounts kept separate.

Cut Down on Tax Write-Offs

One of the benefits of owning a business is the ability to take advantage of tax deductions. Depending on the type of business that you run, you might have any number of expenses needed to run things, many of which can be written off.

But every time you deduct something from your taxes, you effectively reduce your income. But your income plays a key role in your ability to secure a mortgage. The lender wants to make sure that you earn enough to afford a loan.

To give your income a bit of a boost, consider writing off less on your tax return. Just be very careful about how you approach this tactic and speak with a tax specialist first. 

The Bottom Line

It might be a challenge to have your mortgage application approved if you’re self-employed, but it’s certainly not impossible. Be sure to do what you can to strengthen your credit rating and financial situation, and get all the proper documentation together when applying to boost your odds of mortgage approval.