Most people take out a mortgage to land a home, according to the Consumer Financial Protection Bureau. But getting approved for that loan can be a tricky business when you're independently employed. Read on for tips on how to get a mortgage when self-employed.
Irrespective of whether or not you are self-employed, mortgage lenders commonly look for what is known as the four C's when deciding whether or not to approve an applicant for a mortgage. These criteria, according to the government-sponsored mortgage loan company Freddie Mac, are:
It's not the act of being self-employed itself that makes it harder to get a mortgage. Still, solo workers do often find it more difficult to get approved for a mortgage because they have a harder time proving that they meet the four C's described above, particularly the first: the capacity to repay. This plight isn't always because the self-employed have insufficient income to repay a loan but because their employment and income are often more inconsistent and more difficult to verify. The uncertainty of future success in business also works against self-employed people seeking a mortgage.
Meeting the necessary mortgage documentation requirements is a crucial component of how to get a mortgage when self-employed. The specific documentation requirements for mortgage approval vary by lender but generally include some or all of the following:
While not the only factor under consideration, your business structure can undoubtedly influence the odds that you will get approved for a mortgage. Generally, business structures that require the business owner or owners to shoulder the debts of the business personally (e.g., sole proprietorships and general partnerships) are viewed by lenders as riskier business structures. Often, because of the perception that the threat of default is higher. As the Small Business Administration explains, lenders shy away from loaning to sole proprietorships because of a "perceived additional risk when it comes to repayment if the business fails." On the flip side, LLCs and corporations in most cases minimize the personal liability of the owners, so they are generally viewed more favorably by lenders.
Proving your self-employment income isn't quite as easy as whipping out a pay stub or W-2 form. However, if you employ diligent record-keeping practices, you can make the case that you have a consistent income. Some of the documents listed above, such as your tax returns and bank statements, will already help paint a picture of your financial situation for lenders. You can additionally use the following to verify your claims of self-employment income: