Home Loans for the Self Employed: How to Buy a House

Posted on Oct 26, 2021


According to the U.S. Bureau of Labor Statistics, there are almost 11 million independent contractors in the U.S., representing about 7% of the labor force.

If you’re self-employed, you may be wondering how this impacts your ability to buy a home. Getting approved for a mortgage, after all, requires submitting documentation of your job history to your potential lender - and proving that your self-employment is consistent and sustainable can be quite a task. 

It's not impossible, though! It just takes preparation. Here’s what you need to know.

Can I Buy a House with 1099 Income? 

You can definitely buy a home with your 1099 income. Although there are sometimes additional hurdles to getting a home as a freelancer or independent contractor, in general, the process is not actually all that different from getting a home loan as a traditional W2 salaried employee.

Similar to a W2 employee, you’ll need to prove you financially qualify for a loan. This is called the pre-approval process: the lender will evaluate your financial health and determine how large of a home loan you can qualify for (if any). 

“It is not as difficult as people think to get a home loan if they are self-employed. However, their income will need to be evaluated over the last couple of years to ensure the business is profitable from a qualifying standpoint and that their income is stable, predictable and likely to continue in the future,” explains Houwzer Mortgage Advisor Julian Minatel. “For that reason, we will likely need to examine the independent contractor's tax returns for the last 2 years.”

The pre-approval is important because it allows you to know what your maximum monthly payment is, so that you know which homes you can afford. It also shows home sellers that you’re serious about purchasing. So how do you prove self-employment to a lender? Here is the documentation a lender will want from you, as an independent contractor:

Income and Employment Documentation

  • Two years of tax returns (personal)
  • Two years of tax returns (business)
  • Profit and loss forms
  • Businesses financial statements
  • Bank account statements
  • Credit card and loan statements
  • 1099s from clients/customers
  • Any licenses that you hold (state or business license)

Qualifications

  • You will need to provide evidence you’ve been an independent contractor for at least two years. Some lenders will accept one year if you can show a job history of at least two years in a comparable position.
  • You will need a reasonable debt-to-income ratio (the standard requirement is no higher than 45%).
  • You will need a good credit score - and the higher the score, the better the loan rate you’ll receive. The typical minimum for conforming loans (which make up the majority of home loans) is 620.
  • At least 3% down payment

You can still qualify for an FHA loan while self-employed, and the requirements for this are a little less stringent. You’ll need to have:

  • A credit score of 580 or higher
  • A debt-to-income ratio under 50%
  • Minimum 3.5% down payment

A VA (veteran's) loan can also be used by self-employed individuals. If you qualify for this loan, it often comes with the most flexible terms. You’ll need to have:

  • A credit score of 580 or higher (varies by lender)
  • DTI ratios over 41% receive more scrutiny
  • 0% down payment

Why is Getting a Mortgage While Self Employed More Challenging?

You may have heard of the difficulty other contractors have had while trying to qualify for a home loan. The issue with independent contracting/freelancing is that the work itself is often episodic and does not occur on a set schedule. Unlike a salaried employee, who receives a  reliable paycheck every month regardless of the company’s output, the 1099 employee might be part of an industry where one can have three busy months and then two months of no work and back again. 

This potentially unpredictable fluctuation in finances can make lenders nervous - which is why it’s extra important to have clear and detailed documentation of your contracting history so that your ability to support yourself is clear. You should be prepared to submit additional documentation if the lender should ask for it - some mortgage applicants have reported having to provide statements from past employers and more regarding the nature of their work.

Tips for Getting a Mortgage While Self Employed

There are a few ways you can increase your chances of getting a home loan, as well as increase your odds of receiving a low mortgage rate (which will allow you to buy more). 

Understand your numbers, inside and out. Are you paying yourself a regular salary? Do you know your total business expenses and debt? What about your monthly business cash flow? The mortgage pre-approval process will be a lot easier if you can answer these questions before meeting with an advisor. 

Minimize your deductions. When you’re self-employed, there’s a number of deductions you can take in order to greatly reduce your tax liability. However, having less taxable income on the books can make it harder to obtain a home loan - it makes you look like you’re earning less money than you really are. In other words, it hurts your debt-to-income ratio. By law, banks are required to make sure you have enough income to qualify for your home - so they’re not going to be very flexible on an “off the books”-type income arrangement. 

 “A common misunderstanding that we see from independent contractors, is that the income they earn is the income we will use in qualifying them, which is often not the case," notes Minatel.

Keep your personal and business accounts separate. It can be tempting to use your business account to pay for your personal needs or visa versa when it’s just you running your business. Don’t muddy the waters financially - it will make it harder for the lender to determine whether you truly qualify for a loan.

Register and license your business. Though it’s not required, it can help make it easier for you to qualify. “Registering a business as an independent contract makes sense from a qualifying standpoint, as the business will traditionally need to be operational for at least 2 years and you will need proof of this," advises Minatel.

Improve your credit score. This is always true for getting a loan - the higher the score, the better your mortgage rate, and the easier it is to qualify. 

Make a larger down payment. If you’re financially able to, make a larger down payment - it can help assure lenders that you’re not likely to be a liability, since your loan balance is lower. 

Don’t take on additional debt during this time. Lenders are wary of last-minute changes to your financials; you also don’t want to risk pushing your debt-to-income ratio above the maximum.

Hire a CPA (Certified Public Accountant). “You do not have to have a CPA when qualifying for a home loan. However, it may make things more simple, particularly with the independent contractor having a complicated tax situation,” explains Minatel.

What are the Best Mortgage Lenders for Self Employed People?

It’s always a good idea to shop around to multiple lenders - and inadvisable to simply go to your bank and accept whatever loan offer they give you. One person can go to three different lenders and come away with three slightly different offers. But even if someone gives you a loan rate that is .1% better than the next lender, that can be the equivalent of thousands of dollars over the lifetime of your loan.

"As a general rule, all lenders are going to access the independent contractors income the same way," says Minatel. "They should do not favor certain professions or businesses (independent contractors) over others."

Houwzer’s mortgage team does the shopping around to lenders for you, saving you time while delivering a personalized mortgage solution. Unlike most loan officers, who are paid a commission, Houwzer’s mortgage advisors are salaried - ensuring that their focus is on getting the best loan possible for you, rather than finding you the best loan for their paycheck.

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