Self Employed & Getting a Mortgage – What You Need to Know

When you’re self-employed and buying a home, there are special considerations to keep in mind when applying for a mortgage. In addition to standard requirements, the impact of the COVID-19 pandemic has changed underwriting requirements. More documentation is necessary to show the stability of any self-employed business income used to qualify. If you prepare correctly, the process shouldn’t feel overwhelming.  

How can a self-employed borrower prepare for the homebuying process?  

A self-employed borrower will need to provide documentation beyond a salary and a W2. The key is keeping good records and separating business expenses and assets from personal ones.  

Some lenders consider self-employment a higher risk. It can be more difficult to document the stability and continuance of self-employed income used to qualify for a mortgage loan. Therefore, your lender may highly scrutinize it during the underwriting process. Some lenders have a rate adjustment for self-employed borrowers; Elevations Credit Union does not.  

Self-employed income is qualified on the net income (after expenses) with additional add-backs, whereas a W2 borrower is qualified on gross income. Self-employed individuals can be shocked to see their net income is so low after factors like business expenses and tax write-offs. Net income is much different than gross revenue. Because Fannie Mae, Freddie Mac and the FHA base lending decisions on net income, this is the figure you need to focus on.  

As you prepare for a home purchase, you will want to understand your  debt-to-income (DTI) ratio. DTI is the total payments vs. income used to qualify, including the new housing payment. Most loan programs want to make ensure your total housing expense and all other debts do not exceed 45% of the total qualifying income. For self-employed borrowers, this can be even lower depending on the specific lender’s requirements.   Please consult with a tax and/or accounting professional to determine what types of actions you can take to improve your DTI. 

What documents do you need to provide your mortgage lender?  

Documentation is a big part of the process, and it’s crucial to have all the components needed by your lender. As you think about purchasing a home even years in advance, keep in mind the required documentation. In general, you will need to provide the most recent two years of filed federal tax returns, both personal and business. You will also need to provide year-to-date profit and profit-loss statements and balance sheets, and business account statements. Three to 12 months of business bank statements may be required to document business deposits and expenses.  

Information and documents you should put together include:  

  • Tax identification number  
  • Schedule C  
  • Schedule E  
  • Form 1120-S, 1120 or 1065 (as applicable) 
  • K-1  
  • Profit and Loss Statement (P&L)  
  • Letter of Verification of Self Employment from a CPA  
  • Invoices if you are an independent contractor 
  • References  
  • Business license  
  • References or letters from clients  

You may need to include proof of bond insurance and membership to professional organizations, as well as documents that indicated your DBA (Doing Business As).  

What additional documentation could be required to determine the impact of the pandemic on your business’s revenue?  

To determine the COVID-19 pandemic impact on your business, lenders may require additional documentation. This could include quarterly year-to-date P&L or financial statements, month-to-month or quarterly trending added to the year-to-date P&L, and/or additional bank statements to cover the entire year-to-date period.  

What is the best piece of advice for self-employed borrowers?  

Keep personal and business income/expenses separate, open a separate business and personal banking account, and work with a reputable CPA who can help you keep good records and provide tax advice.  

If you have questions about applying for a mortgage as a self-employed individual, reach out to one of our helpful Mortgage Loan Officers today to schedule an in-person, phone or video meeting.  


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