A Step-By-Step Guide to Meeting Self-Employed Mortgage Requirements
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August 27, 2024

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For self-employed individuals, applying for a home loan requires filling out the standard mortgage application that every potential homeowner completes. 

However, the main difference in self-employed mortgage requirements lies in documenting income and employment.

Instead of a lender contacting an employer to verify these details, self-employed applicants must independently provide comprehensive evidence of their financial health. 

Documents include detailed tax returns, bank statements, and profit and loss statements demonstrating their mortgage management capability.

Let’s take a thorough look at how to meet self-employed mortgage requirements. 

Get pre-qualified with Lendistry Home Loans today.

Understanding self-employed mortgage requirements

Applying for a mortgage might feel a bit more daunting if you’re self-employed

Without the usual pay stubs that salaried workers have, you’ll need to take a different route to show lenders that you’re good for the loan.

What you need to prove your self-employed income

Being your own boss means your income might vary more than someone who gets a regular paycheck. That’s why lenders will ask for detailed records. 

Here’s what they typically look for:

  • Profit and loss (P&L) statements: P&L statements give a snapshot of your earnings and spending over time. Keeping these up-to-date shows lenders your business’s profitability and that you manage your finances well.
  • Tax returns: Lenders usually want to see at least two years of tax returns. This helps them verify your income consistency over a longer period.
  • Bank statements: This helps prove that your reported income is the income going into your bank. It’s all about showing a steady flow that can handle a mortgage payment.

Types of mortgages available to self-employed individuals

If you’re self-employed and looking to buy a home, Lendistry Home Loans offers a variety of mortgage options tailored to fit your unique financial situation. 

Here’s a look at the different types of loans available and how they can work for you:

  1. FHA loans: They require low down payments starting at 3.5%. They typically require a 580+ credit score and a debt-to-income (DTI) ratio at or below 50%. A primary residence is required.
  2. VA loans: No down payment or PMI. Requires a 580+ credit score and a DTI ratio at or below 60%. Designed for veterans, active-duty members, and spouses.
  3. USDA loans: No down payment for homes in eligible rural areas. Requires a 640+ credit score and a home that meets USDA standards.
  4. Conventional loans: Requires a 620+ credit score and a DTI ratio at or below 50%. Down payments start at 3%, with PMI needed if less than 20% is put down.
  5. Bank statement loans: Uses 12-24 months of bank statements to verify income. Requires a 600+ credit score and a 10% down payment. LTV can be up to 85%.
  6. Jumbo loans: A 700+ credit score and a DTI ratio at or below 43% are required for larger loan amounts. Down payments typically start at 10%.

How to prepare for a mortgage application

Starting your mortgage application journey as self-employed may seem more intimidating than a traditional loan application. 

You’re proving your current financing standing and your reliability as a borrower over time.

Let’s look at how to set yourself up for success.

Document preparation 

Having the right documents ready will smooth the way forward.

  • Tax returns: Gather the last two years of both your personal and business tax returns. These are essential for verifying your income history.
  • Bank statements: Include the last 12-24 months of personal and business statements to demonstrate steady cash flow.
  • Profit and loss statements: Keep updated P&L statements to reflect your business’s financial health.
  • Proof of income: If applicable, supplement with additional documents such as 1099s or recent pay stubs.
  • Credit report: Obtain and review your credit report early. Correct any errors and address any issues before lenders see them.

Self-employed mortgage application process: Step by step

Approaching the mortgage application involves a series of calculated steps that, when followed diligently, lead to a smoother application experience toward securing your new home.

Initial steps:

  • Assess your credit score: Your credit score is a gateway to qualifying for a mortgage; ensure it’s in good shape. Rectify any inaccuracies and work on improving it if necessary. Knowing your score beforehand gives you a clear picture of the mortgage terms you might qualify for.
  • Evaluate your debt-to-income ratio: This metric is crucial as it shows lenders how much of your income goes towards paying debts. A lower ratio means a better chance of securing favorable mortgage terms.

Application Submission:

  • Organize your documentation: Having your documents organized and readily accessible will help expedite the review process.
  • Choose the right lender: Not all lenders know the nuances of self-employed incomes. Select one that understands and can work with your unique situation.
  • Submit the application: To avoid delays, complete your application thoroughly and double-check for any missing information. Then, submit it alongside all required documentation.

Strategies to enhance your self-employed application

When applying for a mortgage as a self-employed individual, it’s essential to present a clear and stable financial picture to lenders. 

The following are practical steps to improve your application and how Lendistry Home Loans supports you.

Financial tips

  • Boost your credit score: Simple actions like paying down debt and ensuring all bills are paid on time can help improve your credit score, making you a more attractive candidate for lenders.
  • Lower your debt-to-income ratio: This is a key factor lenders look at. You can improve it by paying off debts or increasing your official income, which may involve restructuring your business finances.

Secure your self-employed mortgage with Lendistry Home Loans

Lendistry Home Loans is a minority-owned lender committed to empowering those who often struggle to secure financing through traditional channels, including self-employed individuals. 

We specialize in understanding and addressing the unique financial challenges faced by minority and underserved communities. 

If you’re self-employed and finding the road to homeownership overwhelming, Lendistry Home Loans offers mortgage solutions designed just for you. 

Apply for a self-employed mortgage with Lendistry Home Loans today.

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