Ready to buy a new home or refinance your existing mortgage but not sure how the process works for freelancers? Not to worry, there are many home financing options available to self-employed borrowers.
Who Is Considered Self-Employed?
When it comes to applying for a home loan, the distinction is generally drawn between traditional income earners and self-employed income earners. Traditional employees receive a Form W-2 from their employer, and that is used to document their income on a mortgage application.
Self-employed borrowers can include:
- Business Owners
- Gig Workers
- Sole Proprietors
- Independent Sales Professionals
Because these individuals don’t have a W-2 showing how much they earn each year, they will need to provide alternative income documentation.
Self-Employed Income Documentation
For most conventional and government loan programs some or all the following documents will be needed to show self-employed income:
- One to Two Years of Personal Tax Returns
- One to Two Years of Business Tax Returns
- Business License (if applicable)
- Business Registration
- Profit and Loss Statement for the Business
- A Letter from the Business’s CPA Confirming its Status
Specialty mortgage programs, many designed with self-employed borrowers in mind, provide additional options for documenting income. These Non-QM loan products may use one of the following methods:
- Bank Statements
Income is shown as the difference between deposits and withdrawals over a period of time on business or personal bank statements.
- Form 1099
For freelancers or subcontractors who receive 1099s showing their income from the businesses they work with.
Have questions about your income documentation options? Give us a call today to discuss your scenario.
Does All Self-Employed Income Qualify?
Because a brand-new business or venture represents greater risk when compared to an established one, many mortgage programs require that self-employed individuals show a two year history in the business to be eligible. This means having two years of tax returns, which generally amounts to more than two years from opening day, depending on when the business return is filed.
Exceptions can sometimes be made if the new business is in the same field that the individual has a long history in as a traditional employee.
What if a Borrower Has Multiple Jobs?
It’s not uncommon in today’s economy to have multiple jobs, perhaps with various compensation structures. For example, a potential home buyer may have a part time job for a large corporation and run their own business on the side. This is no problem for many home loan programs.
The income from the corporate job can be documented with a Form W-2 and the qualifying income from the side business through alternate documentation, with both considered on the loan application. In some cases it could be possible to qualify for a mortgage using only the traditional income. It may not be necessary to document the self-employment income if it is not needed – talk to your loan originator to learn more about this possibility.
Qualifying for a Mortgage as a Freelancer
Though the income documentation is different for self-employed borrowers, the other qualification factors are the same that would be evaluated for a traditional income earner. Some of these may include:
- Credit History and Score
An applicant’s credit report shows how they have handled credit accounts in the past, which can be used to show how likely they are to repay a new home loan as agreed. Most mortgage programs require a minimum credit score to be eligible.
- Equity Position
Some home loan programs require a down payment of ten or twenty percent of the home’s value (or that the homeowner have eighty or ninety percent equity in the home if refinancing.) Others, notably government products such as FHA Loans and VA Loans, have low or even no money down options.
- Other Debts
Existing monthly payments on credit accounts such as car loans, student loans, credit card balances, and other mortgages as applicable will be calculated to determine the amount that can be borrowed with a new mortgage loan.
- Occupancy Type
The requirements may vary if the home will be used as a primary residence, vacation or second home, or investment property.
- Property Type
Financed properties can be single family houses, townhomes, condos, lots and land, manufactured houses, mobile homes, duplexes, and multi-unit properties. Not all programs will finance all property types.
Contact us to learn what you could qualify to borrower for a new home, or what you might save by refinancing.
Mortgage Rates for Self-Employed Borrowers
As a general rule mortgage rates for freelancers and other self-employed individuals aren’t any different than the rates available to traditional employees. Pricing varies by program and the specific scenario. For example, rates tend to be lower on shorter term ten- and fifteen-year loans, when compared to thirty-year loan terms. When borrowing a larger percentage of a home’s value rates are generally higher than when the homeowner will have more equity in the property.
A few other factors that can impact pricing include the applicant’s credit history and score, occupancy type, property type, if the loan is a fixed rate mortgage or adjustable-rate loan, and current market conditions.
Interested in applying for a new mortgage as a self-employed borrower? Call today for a quote for current mortgage rates.