Many entrepreneurs struggle with lenders when they decide to buy a home. Being an entrepreneur (aka a “self-employed borrower“) comes with its own set of rules when figuring out how to get approved for a mortgage by a lender. Do not worry: you can get a mortgage as an entrepreneur! We will show you how—Just because you own your own business doesn’t mean you can’t own your own home too.
Mortgage options for self-employed borrowers
It’s more difficult to qualify for a mortgage as an entrepreneur than as a salaried employee, but it’s not impossible. Not only will you need to consider the normal factors of choosing a mortgage, but you’ll have to go the extra yard to prove to the lender that you are worth the additional risk. The main reason lenders struggle with approving self-employed borrowers is because they typically have a fluctuating flow of income. If you want to buy a home, and you’re self-employed, there are a few different options you can take to secure that mortgage loan. You can try any of the following:
- Proof of income
- Search for alternative lenders
- Find a co-signer
By utilizing all of your options, it’ll be easier for you to get a mortgage for a home and avoid common mortgage mistakes. Additionally, you’ll be more prepared when it comes to talking to lenders when they ask you specific questions about your income and employment status. It’s important to note that you’re not alone when it comes to qualifying for a mortgage. You’re not the first self-employed person to find a way to do it and you definitely won’t be the last. You will run into frustrating aspects of the process but if you stay the course you will come out of it with a mortgage and a personal home.
How do I prove my income?
Proving your income is one of the most crucial steps in getting a mortgage because it’s how lenders know you’re able to pay them their money back. This is what lenders are looking for when they assess your financial situation. They want to know if you can make the payment. It’s easier for people who have traditional jobs because lenders can look at their salary and expenses, and tell whether or not they will be able to comfortably make the monthly payment (the “mortgage note”). It’s more difficult for entrepreneurs because lenders want to see a consistent record of your income from your business for at least two years. Proving business income in at least two years will help prove your business endeavors can handle mortgage payments and aid in qualifying for a mortgage. It’s best to be prepared with the appropriate documentation before you apply for a mortgage. You need to provide these documents when proving your income and increase your chances of securing a mortgage as an entrepreneur:
- Your business tax returns and similar documents,
- Your personal tax returns and similar documents,
- Any other documentation of your income (bank statements, profit and loss margins, business license, etc.).
In general, the tax returns for your business and personal life will be analyzed to see if you can make the payment for a home. Additionally, most lenders say only taxable income will qualify. Income from any investments or other assets that can’t be taxed will not apply but you still might need to provide it.
Debt to Income Ratio
When your application is being assessed for a mortgage, you’ll commonly hear lenders tossing around the term DTI ratio. A DTI ratio is a financial calculation based on your expenses and your income statements. If your expenses are too great compared to your income then you’ll have a high financial DTI ratio and most likely won’t be able to qualify for a loan at most places. However, if your income has remained higher and your expenses are lower, then your DTI ratio will be low and lenders are more likely to consider your application. It’s important to know your DTI before you submit your application to lenders. You can use a DTI calculator to figure out exactly where your ratio stands and whether or not it’s too high.
Some great ways to lower your DTI ratio before applying for a mortgage are:
- Paying off your car note
- Paying down credit cards
- Paying off student loans
Good credit is important. Full stop. If you don’t already have good credit then a mortgage lender will deny it without even looking at your debt or the work you do. Improving your credit is something you should work on before you actually submit any applications for a mortgage. This is especially important if you have a small business that has only been operating for a few years. Wondering what credit score is needed to buy a home? Small business owners should aim for a range of more than 700. You can build your credit by making payments on any outstanding balances and getting out of debt. It’s important to always be monitoring and aware of what your credit is. The better you can get it, the more likely you’ll be able to secure a loan.
Who are the best mortgage lenders for the self-employed?
Another option to consider is searching for lenders that are known for lending money to entrepreneurs. These banks and lenders better understand your situation and have likely worked with other entrepreneurs in your same position. Rocket Mortgage by Quicken Loans has historically been known as one of the best lenders for entrepreneurs and offers a great rate on a loan. They’ve been known to have a quick turnaround time on your application and also only require a credit score of 580. Another well-known one for self-employed people is Luxury Mortgage. If you’re self-employed then Luxury Mortgage will understand your situation and most likely approve you if you check all of their boxes. Both of these options will help you calculate how much mortgage you qualify for but we always recommend that you do the research to the best option that fits your situation.
How to find a co-signer?
The last option you can explore is finding a co-signer to sign on with you for your mortgage. Enlisting a co-signer is commonly done when a borrower doesn’t have good enough credit to qualify for a loan or the mortgage lender really isn’t sure about approving the loan. Basically, a co-signer agrees to make the payment on the loan should you not be able to (when they sign, they are essentially telling the lender that they will have your back by making the payments if you cannot). Mortgage lenders will look at the co-signer’s credit score and DTI ratio to see if they are qualified to co-sign.
Co-signers are common for entrepreneurs. For bigger payments, like a first mortgage, it’s best to find a close family member who understands your business and how you make money. This way, you’ll never have to worry about them stressing about your monthly payments because they know how your business operates and that you are able to generate an income. Finding a co-signer should be considered as a last option after you’ve exhausted your other options. It’ll help you avoid putting a close friend or family member in a situation where they have to sign their name on payments that you will be making.
Getting a mortgage to work is more difficult if you’re self-employed than for traditional salaried employees, but it’s not impossible. By taking advantage of your options as a borrower and doing some research, you too can get approved for a mortgage and find a home that you want to live in. Owning real estate is a process, but business owners need homes too.