If you’re seeking a mortgage loan while self-employed, you might be unsure whether or not a lender will take you seriously. Being self-employed won’t scare mortgage lenders away if you prove that you’re financially stable and can make your monthly payment.
Self-employed borrowers have the same burden of proof as borrowers who work for a business or a corporation. Lenders will want to know your credit score and see the last few months’ bank statements, among other documentation.
Here’s everything you need to know about navigating Florida’s real estate market as a self-employed individual.
What Is a Self-Employed Mortgage?
A “self-employed mortgage” is the same as a traditional mortgage. The only difference is that you’ll need proof of self-employment income instead of the W-2 you’d receive from a company.
Qualifying for a Loan with Self-employment Income
Business owners must provide both personal and business income tax returns for the most recent two years (exceptions apply).
Qualifying for a home loan with only one year of self-employment income proof is possible, although not very common, if you can prove you’ve been on a similar professional path for the past two years. This could mean any of the following.
- You have qualifying W-2 employment. If you can prove you worked at a company the year before starting your own business that paid you the same amount (or higher) as you are now, the lender might make an exception.
- You were in college or university. Depending on the lender, you might still be considered for a mortgage loan if you enrolled in school the year before being self-employed.
Some business owners may also prefer to use only their most recently filed tax return for income calculation. Lenders will allow the use of one years worth of taxes if the company has been in business for a minimum of 5 years.
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Types of Self-Employed Mortgage Loans
The loan options available to you as a self-employed home buyer are the same as a borrower with a W-2 position.
- Conventional Loans
- FHA Loans
- Non-Qualified Mortgage Loans
- Private Loans
Conventional Loans
A conventional loan is any loan type that is not backed by a government organization such as the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), or the U.S. Department of Veterans Affairs (VA). Examples of conventional loans include Fannie Mae and Freddie Mac.
Borrowers eligible for conventional loans can save more money than the average home buyer. The mortgage payments are typically low, and they don’t have to pay upfront for mortgage insurance. If you qualify for this loan type, you can even put up a down payment as low as three percent.
Important things to note:
- Conventional lenders can be strict. Your credit score cannot be lower than 620 for you to qualify, and your debt-to-income ratio (DTI) needs to be between 43-55 percent or less.
- There are loan limits. Conventional loans also have limitations. If the amount you need to borrow is higher than the set limit, this might not be your mortgage loan.
Conventional loans are best for home buyers with an above-average credit score and low monthly debt. Lenders that offer government loan programs are typically less strict if you cannot get approved for one.
FHA Loans
An FHA loan is one that the Federal Housing Administration backs. The FHA protects mortgage lenders from losing money by agreeing to payout any unpaid balance if a borrower defaults and goes into foreclosure. This protection allows them to provide more buyers with quality housing options.
Borrowers seeking this loan type will have less strict credit requirements but must pay for mortgage insurance upfront. This is because mortgage companies and lenders are assuming more risk by offering a home loan to someone with low credit; the insurance requirement balances that out.
Important things to note:
- Government-backed lenders are less strict. The minimum required credit score for an FHA loan is 580, making them much more flexible than conventional lenders.
- You’ll have to pay mortgage insurance upfront. FHA loans require two insurance payments; an upfront mortgage insurance premium (MIP) of 1.75 percent and a monthly mortgage insurance premium (included in your monthly payment).
- You don’t have to pay the MIP for the life of your home loan. If you make a down payment of 10 percent or more, your MIP will fall off your mortgage payment after 11 years.
An FHA loan is best for borrowers with below-average credit that don’t mind paying more upfront on their mortgage loan. Government-backed lenders are much less strict; this gives more self-employed people the opportunity to purchase a home.
Non-Qualified Mortgage Loans
Non-qualified mortgage loans are another type of conventional loan. They are meant to assist borrowers with trouble qualifying for a traditional one or with unique circumstances. This is good news for self-employed people because they can still have the opportunity to purchase their dream home even if they were denied after submitting a mortgage application elsewhere.
Borrowers seeking this loan type will usually have to pay much more in interest over the life of their loan than the average homeowner. Nonetheless, it could be worth it if they’ve exhausted all other loan options.
Important things to note:
- Non-qualified loans are often high interest. This type of home loan is usually high interest because of the non-traditional circumstances of the buyer (ex: low credit score).
- A high debt-to-income ratio can be accepted. If your debt is a little high, you could still be eligible for a non-qualified home loan.
- Suitable for self-employed people. If you’re self-employed, you’ll have an easier time getting approved for this mortgage loan.
Non-qualified loans are best for borrowers that have higher than average amounts of debt, low credit, or who are in unique circumstances (ex: business owners).
Private Loans
A private loan, also called a “bridge loan” is a short-term loan offered by a local portfolio lender instead of a central bank or other depository bank. Unlike traditional banks, a private portfolio lender sets their own lending criteria, this means that you can secure financing for more asset classes, including commercial and land. A private loan is a great option for self-employed buyers that need fast and reliable financing so they can close as quickly as a cash offer would.
Typically private lenders will offer 50-65% financing and can close in less than 10 days. Approval times for a private loan are also much faster, ranging from 1-2 days. The application process is more streamlined than a traditional mortgage application, and requires minimal documentation. In terms of income documentation, a private lender will usually only need a copy of your most recent bank statement, showing enough funds to cover interest payments.
Since private loans have a much shorter repayment period (1-3 years), compared to a traditional mortgage (15-30 years), it is important to have an exit strategy in place to payoff the loan at maturity. Common exit strategies include:
- Selling the asset
- Refinancing with a conventional loan
- Income from other business venture
Private loans are an ideal option for local and international investors. It's important to note that most private lenders will not lend on la property that will be used as a primary residence. Working with a local lender who understands your market is always recommended, since they will likely see value where others do not.
What Are the Rules for Self-Employed Mortgage Loans?
To qualify for a loan as a self-employed person, you’ll have to meet specific criteria first. As highlighted above, every loan type has its requirements, but here is the comprehensive list most lenders seek from a borrower.
General Criteria for Self-Employed Loans
- Credit score. Conventional loans have stricter credit score requirements than government-backed loans (ex: FHA loans), and private loans are not credit score driven.
- Credit history. Similar to the two-year rule regarding your income, you’ll also have to prove at least two years of credit history with on-time payments. Private loans do not require a specific length of credit; however, delinquencies (ex: foreclosure) will require further explanation.
- Current debts and debt-to-income ratio (DTI). No income documentation is required for private loans through Vaster because we don’t need to verify it in this case. You’ll need to provide two years’ worth for verification for all other loan types, and your DTI must not exceed 50 percent.
- Liquid savings and assets. You’ll need to provide a copy of your bank statements for private loans. Your bank account must show that you have sufficient liquidity to cover six months’ worth of interest payments. Liquidity is the amount of cash and assets readily available to pay bills on short notice.
Most mortgage lenders will require you to meet some or all of the above criteria to qualify for a home loan. You should keep very detailed records as a self-employed person; you’ll need to produce many different types of documentation during the home buying process.
Self-Employed Income Documentation
There are several ways you can show income as a self-employed individual. If you do contract work, your employer will likely provide you with a 1099 form at the end of the tax year. Here are some other ways to prove your income.
- Personal bank statements
- A profit/loss statement
- 2 years worth of tax returns (including your business tax returns)
- Pay stubs (if you pay yourself this way)
Before you fill out your mortgage application, ensure easy access to all your essential documents; the lender will ask for them immediately.
Are You Self-Employed?
Not sure if you qualify as a self-employed person? You are considered self-employed if you own 25 percent (minimum) of a business, are a freelancer, or work as an independent contractor and receive a 1099 tax form.
Examples of Self-Employment
Here are some fields of work that are popular among self-employed individuals.
- Entrepreneur
- Real Estate Broker
- Consultant
- Freelancer
- Doctors
- Lawyers
- Real Estate Investor
- Landlord
These fields of work (and many others) are sought after by freelancers because they are in high demand and have high-income potential.
Self-Employed Income Calculation
Regarding income, mortgage companies often have more difficulty crunching the numbers for freelancers or independent contractors. To calculate the monthly payment for self-employed people, mortgage lenders have to refer to documents like 1099’s or profit/loss statements. These are less straightforward than a typical pay stub or W-2.
When you’re self-employed, lenders look at your net income, not your gross income, like they would if you had a W-2 position. If you want to calculate your net income for your mortgage application, follow these two simple steps.
- Determine your net profit amounts (before exemptions or taxes) for the two most recent tax years and add them together
- Divide the total amount by 24 (number of months in two years)
Knowing your net income will give you some idea of what to expect from a mortgage company; however, the lender will still need to verify your income on their own.
Get a Self-Employed Mortgage With Vaster
If you’re self-employed and looking to qualify for a home loan in Florida, we’d love to work with you. There’s no long and drawn-out purchase process. Our skilled loan specialists help home seekers close on properties quickly; how it should be.
Whether you’re a freelancer or a business owner, we have the ideal mortgage solution for every type of buyer. Reach out to us; we’ll get you into your dream home.
Sources:
Conventional Loan Vs. FHA: What Are They? | Quicken Loans
7 Types of Conventional Loans to Choose From | LendingTree
Federal Housing Administration | HUD.gov / U.S. Department of Housing and Urban Development (HUD)
How To Get A Mortgage When You're A Self-Employed Home Buyer | Rocket Mortgage
Self-employed mortgage borrower? Here are the rules | themortgagereports.com
Private Mortgage: What You Should Know Before You Borrow | Rocket Mortgage
How Much Credit History is Needed to Buy a House? | creditstrong.com
THIS is how to show proof of income when self-employed [2022] | stilt.com
How to Calculate Self-Employment Income | Experian
Pamela Garcia: September 23, 2022
Vincent Diaz: September 23, 2022
George Fraguio: September 23, 2022
Pamela Garcia