Understanding home loans for the self-employed

Buying a home is a big deal. When you’re self-employed, it can feel like a big headache. We have some tips to take the pain away.

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Owning a home is a dream for many of us. Owning a business is, too. Gig worker, freelancer, independent contractor, small business owner – whatever you call yourself – if you’re self-employed and thinking about a future home, a few Google searches make it seem that doing both things is hard, if not impossible. Don’t fret!

It’s true. There may be some additional hoops to jump through if you’re self-employed. But don’t worry – you can get a mortgage if you work for yourself, and we did a little work here ourselves to demystify the process.

Why can it be harder to buy a home when you’re self-employed?

Can’t pay for a house in cash? You’re not alone! Most buyers need a mortgage. There are three main reasons why securing a mortgage can be more difficult when you own your own business.

  1. Mortgage lenders like to see evidence of consistent salary. The benefit of having a traditional job for homebuyers is that employees get a W-2. This tax form reports your wages paid by an employer. This easily verifiable documentation ensures lenders that you have a steady income, and that means you can make monthly mortgage payments, something lenders care about! Most self-employed people will have 1099s or a Schedule C instead of a W-2.

  2. Many self-employed people and business owners leverage business expenses as deductions to reduce their income tax burden. Deductions save you money come tax time but make it appear like your qualifying annual income for a mortgage is lower. Your lender may question whether you make enough to make your monthly payments.

  3. Paperwork is a pain. Some lenders aren’t interested in navigating the extra paperwork needed to help a business owner secure a mortgage. But extra paperwork doesn’t phase Fremont Bank.

How can I increase my chances of getting a mortgage when I’m self-employed?

You don’t have to run out and get a new cubicle job! Here are five to-dos to get you ready for a mortgage loan as a business owner. 

  • Get your paperwork in order including:

    • At least two years of personal and business tax returns

    • Proof of status as a business owner or self-employed individual, including your business licenses and insurance, client letters, contracts showing upcoming work or list of unpaid accounts receivable, a statement from your accountant

    • Current year Profit and Loss Statement

    • Document assets like savings or investment accounts or additional sources of income such as alimony or Social Security

  • Gather proof of current rent or mortgage payments
  • Document any cash reserve in an emergency fund to:
    • Show you can pay your mortgage even in the event of a decline in business

    • Ensure you have funds to pay property taxes, insurance, or repairs

  • Maintain your excellent credit by:
    • Paying bills on time

    • Checking for reporting errors

    • Paying down credit cards

    • Trying not to use more than 30% of the limit on any credit card

    • Increasing your limit strategically and when appropriate

    • Dealing with any collections accounts as needed

    • Adding rent and utility reporting where available

  • Save for a larger down payment and focus your search on the lower end of what a mortgage calculator says you can afford. A lower loan-to-value (LTV) ratio, which measures your mortgage against the appraised value of a property, and can improve your approval chances. A larger down payment or a smaller loan amount improves your LTV.

  • Pay down other existing consumer debt

What types of mortgages are available to business owners?

There are three types of mortgages that can work for many self-employed people.

Conventional loans are available with a range of terms that may work for a borrower but can require stricter documentation than FHA loans, discussed next.

  1. Adjustable-rate mortgages (ARMs) have variable interest rates that increase or decrease at set intervals after an initial period with a fixed rate. Some home buyers like ARMs because the initial interest rate is often lower. 
  2. A fixed-rate mortgage carries a consistent interest rate for the loan term, usually 15, 20, or 30 years.

FHA loans are insured by the Federal Housing Administration. Since these types of mortgages require a lower minimum down payment and have lower credit qualifications, they’re popular for first-time homebuyers and the self-employed. Adjustable- and fixed- rate options are available. That flexibility comes with high upfront and annual costs in the form of mortgage insurance premiums.

If you don’t think you’ll qualify for a mortgage on your own, a joint mortgage or enlisting a co-signer could create more options. 

How do I find a home loan lender when I’m self-employed?

It’s helpful to start with a lender with experience supporting the self-employed through the underwriting process. You can also look for a lender with experience working with first-time homebuyers. Good thing is, you’ve already found them. 

Fremont Bank offers significant experience with first-time and self-employed buyers, a deep understanding of local market conditions, and flexibility with approvals and quicker closes. You can’t beat the personal service, either. 

Remember: A pre-approval letter can help you understand how much you can borrow and also let you see fees like closing costs and points, and other sometimes hidden details that can add up to mega dollars. Be sure high closing costs do not ruin the initial appeal of a low rate!

Want to talk to a local lender to understand local market conditions? We’re ready!

Does Fremont Bank offer mortgages to self-employed individuals?

Proudly! We are, after all, a small, family-owned business ourselves. Many small business owners and self-employed individuals choose to bank with us for their personal and business banking needs. 

We know how vital home ownership can be for some and that it can be more challenging for self-employed people. That’s why we created our straightforward Mortgages Without the Mystery℠ loan process to help you understand the many mortgage choices available from Fremont Bank.

We want to make those home-owning dreams a reality for business-owners. Let’s talk.