This year, 9.59 million Americans are self-employed.[i] These entrepreneurial types are known for their ambition, creativity, and financial acumen. For successful self-employed business owners, making money may not be a challenge. However, qualifying for a mortgage can be.
In this article, we’ll discuss the mortgage eligibility rules regarding self-employed income and employment. We’ll also provide six tips mortgage lenders can use to help their self-employed applicants qualify.
Self-Employment in 2023: By The Numbers
Self-employed borrowers are people who aren’t W-2 employees or possess 25% or more ownership in a business.[ii]
Now that you know the specifications for self-employment, let’s take a look at some notable statistics:
- Nearly 3% of Americans are currently self-employed.[iii]
- 15% of Americans are independent contractors.[iv]
- 70% of Americans want to be self-employed one day.[v]
- 40% of traditional employees say it’s somewhat likely that they’ll be self-employed in the next two years.[vi]
- Over 50% of Americans who are highly educated and/or under 35 say it’s likely they’ll work for themselves in the next two years.[vii]
- 95% of self-employed Americans plan to stay self-employed for the foreseeable future.[viii]
Based on these statistics, it’s clear that self-employment is a goal for a growing number of people. What’s more, those who achieve this goal want to maintain their self-employed status.
Can Self-Employed Borrowers Qualify For Mortgage Loans?
Business owners and contract workers can certainly qualify for mortgages. Contrary to some common misconceptions, they’re held to the same standards as salaried employees.
These go-getter applicants simply need to meet the basic requirements for their chosen mortgage program. These requirements typically include having an:
- Adequate down payment
- Sufficient credit score
- Low debt-to-income ratio
- Steady, verifiable income
- Stable, two-year employment history
While business owners don’t have to have higher credit scores or lower DTIs than W-2 workers, they can face some unique hurdles when it comes to their income and employment.
Employment Rules For Self-Employed Borrowers
Conventional and government-backed programs prefer applicants who have a two-year history of consistent employment.[ix] Thus, business owners and contract workers typically need at least two years of tax returns displaying their self-employed status.
While this rule applies to most mortgage applicants, lenders and underwriters can use their discretion and make exceptions on occasion. These exceptions may be granted to borrowers who have:[x]
- One year of documented self-employment, as well as two years of employment history in a similar line of work (the new self-employed income must be greater than or equal to that of the previous role).
- One year of self-employment, along with one year of related formal education or training in their field.
To qualify for one of these exceptions, borrowers typically need to possess persuasive compensating factors, such as a:[xi]
- High down payment
- Ample cash reserves in the bank
- Excellent credit score
- Very low DTI
- Recent history of successfully paying rent that’s higher than their expected mortgage payment
Since these factors suggest a strong ability to make mortgage payments, underwriters may allow them to compensate for an self-employment history of less than two years. Even so, 12 months of verified self-employment is the bare minimum.
Income Rules For Self-Employed Borrowers
After ensuring stable self-employment, underwriters want to verify that self-employed applicants have stable incomes.
Many business owners and contract workers earn variable amounts month-to-month. To account for these fluctuations, underwriters often calculate gross monthly income using a monthly average.
Underwriters also like to see that a business’ income is increasing over time. Steady business growth suggests that the self-employed borrowers’ income will remain stable as they enter their mortgage repayment period.
What Documents Do Applicants Need to Provide For Proof of Income?
If a self-employed applicant has a sole proprietorship, they can simply provide their personal Schedule C / 1040 tax form and bank statements as proof of income.
Those who run partnerships, corporations, or S corporations should ask their CPA to prepare the following documents, as well:
- Business license (if required)
- Business tax returns
- Year-to-date profit and loss statements
- Balance sheets
The Impact of Tax Write-Offs
Business owners with creative accountants may write off as many expenses as they can each year to lower their taxes. While this tactic can save them money with Uncle Sam, it may end up hindering their mortgage eligibility.
That’s because underwriters only look at income verified by the Internal Revenue Service (IRS). If a business owner suppresses their gross annual income using crafty tax write-offs, they’ll have to accept the loan size limitations that arise as a consequence.
Are There Exceptions to the Two-Years of Income Rule?
As with employment history, there are exceptions to the two-year income requirement for self-employed individuals. Most notably, self-employed borrowers who have run their businesses for over five years (with tax returns to back it up) can choose to submit just one year of income.[xii]
Thanks to this exception, business owners who have been liberal with their tax write-offs in the past can change course the year before they intend to apply for a mortgage.
6 Tips To Support Self-Employed Mortgage Applicants
Since self-employment is on the rise, many mortgage lenders are looking for ways to support these types of borrowers.
Here are six tips to do just that:
1. Share educational content – Many business owners and contract workers may not know about the two-year income and employment requirements. By sharing educational materials (blog articles, videos, infographics, podcasts, etc.) about these topics online, you can empower them to satisfy these requirements well before pursuing homeownership.
2. Encourage interested applicants to reach out early on – As a mortgage lender, you can serve as a trusted advisor to self-employed individuals who want to buy a home in the next few years. During your initial consultation, educate them on the eligibility requirements, explain the impact of generous tax deductions, and coach them on their creditworthiness using Certified Credit’s credit score improvement tools.
While you may not transform these potential applicants into borrowers overnight, your guidance and ongoing support will likely ensure you win their business when they’re ready to buy a home in the future.
3. Suggest self-employed applicants to provide letters of recommendation – Business owners and contract workers can strengthen their perceived income stability by including letters from their landlords confirming their on-time payments, as well as their monthly rent amount, along with letters from their loyal clients and customers. These letters can provide the boost in confidence underwriters need to qualify on-the-cusp entrepreneurs.
4. Automate your verification of income and employment (VOE) process – Manual VOE can be tedious, even when you’re dealing with salaried employees with dependable incomes. Applicants who have alternative incomes can be even more time-consuming to verify. You can unburden yourself of this complicated process by leveraging an automated VOE solution, such as Cascade VOE.
This tool can verify applicants’ incomes and employment history on your behalf. You simply need to set up a custom cascade of third-party vendors and arrange them in your preferred order. After that, Cascade VOE will cycle through your personalized roster of vendors until it returns a hit. Any verification requests that come up short can be completed manually by Certified Credit’s dedicated manual VOE division.
5. Strengthen your verification of assets (VOA) process – In addition to income, you’ll want to carefully review your self-employed applicants’ assets. After all, they may be the compensating factors allowing you to approve an exception to the two-year rule.
Certified Credit can help you streamline your VOA process. Our digital VOE solution makes verifying your applicants’ deposit, retirement, and brokerage accounts a breeze. It delivers accurate results with quick turnaround times. Best of all, it’s Day One Certainty Compliant.
6. Stay up to date on the IRS’s latest tax forms – Without pay stubs or W-2s, you’ll have to rely on your self-employed borrowers’ tax returns and bank statements to make your lending decisions. Thus, after fortifying your VOA, it’s important to understand the IRS’s tax forms.
As of March 2023, the new 4506-C form is available. It satisfies the long-awaited OCR (Optical Character Recognition) software standards. This helpful guide can teach you how to use this form with ease.
Qualify More Self-Employed Borrowers With Certified Credit
In summary, self-employment is increasing in popularity. As more people venture out on their own and embrace self-employment, they’ll need mortgage lenders who provide them with tailored support and eligibility education.
You can become one of these lenders by partnering with Certified Credit. From our credit score improvement tools to Cascade VOE, we have the solutions you need to provide your self-employed applicants with a supportive, efficient lending experience. Along with these tools, we also offer:
- Affordable credit reports
- Automated lead generation and borrower retention tools
- Automated prequalification
- Automated undisclosed debt monitoring
- Flood zone determinations
- Fraud and risk support
- Settlement services
Schedule a credit consultation with us to learn how these products and services can help you grow your remortgage lending business today.
Want to learn more about self-employed mortgage applicants? Tune into this Talk Data to Me podcast episode to find out how gig workers, self-employed borrowers, and independent contractors can navigate today’s mortgage lending landscape.
[i] Oberlo. How Many Americans Are Self-Employed in 2023?
[ii] The Mortgage Reports. Self-Employed Mortgage Loan Requirements 2023.
[iii] Oberlo. How Many Americans Are Self-Employed in 2023?
[iv] Bloomberg. More Americans Are Self-Employed Than You Think.
[v] 20SomethingFinance. 70% of Americans want to be Self-Employed. 6% Are.
[vi] Freshbooks. FreshBooks 2021 Annual Self-Employment Report.
[vii] Freshbooks. FreshBooks 2021 Annual Self-Employment Report.
[viii] Freshbooks. FreshBooks 2021 Annual Self-Employment Report.
[ix] The Mortgage Reports. Can You Get a Mortgage If You Just Started a New Job?
[x] The Mortgage Reports. Self-Employed Mortgage Loan Requirements 2023.
[xi] The Mortgage Reports. Can I buy a house without a 2-year job history? (Podcast).
[xii] The Mortgage Reports. Self-Employed Mortgage Loan Requirements 2023.