Qualifying for a Mortgage When You’re Self-Employed

If you are self-employed, it can be challenging to provide documentation for a mortgage application. Learn about approaches and documentation that can help show your proof of income and employment history, as well as tax considerations for managing your debt-to-income ratio.

When applying for a mortgage, lenders will look at your credit history, the amount of capital you have, the type of property you plan to purchase and your capacity to repay the loan. Your capacity to repay the loan is typically determined by your income and employment history. This can be complicated for homebuyers who do not have traditional documentation of their income and employment.

Here are a few tips to help you through the homebuying process if you’re self-employed.

Proof of income

Depending on the nature of your self-employment, you may have income from freelance work, side jobs, gig work, contracting or a business you own. To determine how much you're able to borrow, lenders will combine your sources of income into your total taxable income.

Lenders want to see that the amount you earn from self-employment is steady or (ideally) increasing over time. For homebuyers with a traditional job, paystubs and W-2s serve as proof of regular income. But for self-employed individuals, income records could include:

• Two years of personal tax returns.
• Two years of business tax returns including schedules K-1, 1120 and 1120S.
• Year-to-date profit and loss statement.
• Balance sheet.

Debt-to-income ratio

Once you provide proof of income, your lender will evaluate your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income used to pay your mortgage and other debts. DTI is calculated based on your income after expenses and this can be tricky for self-employed borrowers. 

As a self-employed taxpayer, you may want to deduct as many business-related expenses as you can, because it reduces your taxable income — and your tax bill. On the other hand, less taxable income could create a higher DTI based on the lower amount listed on your tax documents. This is important to keep in mind when you are preparing to buy a home. 

Employment history

Most mortgage lenders require at least two years of consistent self-employment in the same industry, so it's important to keep good records of your work history. The following documents can be used to show consistent self-employment:

• Letters from current clients.
• Signed CPA statement.
• Business license (if you are a business owner).
• Proof of insurance for your business.

If you haven't been self-employed for two full years, lenders may accept a W-2 from a previous employer in combination with the documents listed above.

As you begin your search for the right home, it's important to work with a team of professionals who can help you make informed decisions along the way. They will be an invaluable resource in navigating the process as a self-employed homebuyer.