Is Self-Employment a Barrier to Getting a Mortgage?
Self-employment has always been a staple of the American dream. What can be more attractive than being your own boss and making life and business choices yourself? However, this pillar of freedom and self-reliance may become an obstacle on the way to another core element of the American dream – owning a home.
Of course, if your business earns you enough money to buy a dwelling for a lump sum, you can celebrate the housewarming party as soon as you like. Problems start when you need a mortgage to purchase the property.
Mortgage Options for the Self-Employed
Self-employed individuals (those who own at least 25% of a business that provides their main income) don’t qualify for traditional mortgage loans. Why? Because basic financial documents applicants for such loans submit are pay stubs and the W-2 form. Both are issued by the employer and contain information on the employee's earnings, deductions, and taxes over a certain period. Since a self-employed person is the employer and the employee rolled into one, they can't issue the document to themselves.
Given the fact that the self-employed make up approximately 10% of US residents, it's quite natural that lending agencies can't leave this 30+ million-person consumer pool without an opportunity to buy a house. There are several types of self-employed mortgages opening the door wide to homeownership for this segment of society.
However, self-employed individuals face certain limitations when applying for any of these loan types. And the most serious of them is having at least two years of self-employment under your belt. What if you are a year shy of this period?
Getting a Self-Employed Mortgage with One Year of Working in This Labor Category
No universal rule or state/federal law tells you what to expect when you apply for a mortgage with only one year of self-employment. Each lending agency has its own policy regarding such customers. Moreover, each case is viewed separately because details and circumstances differ.
What are the typical mortgage requirements for this category of self-employed people?
- A two-year track record in the same industry or employment in a similar sphere. Such experience is easy to prove if you first worked as an employee in a, say, IT company and then moved on to become a freelance web designer or founded your own software development firm. But if you are a former staff assistant of a high-tech firm turned independent app developer, a lending agency is unlikely to give you a loan. Anyway, relevant employment should be proven by a documented income that is at least equal (and preferably greater) to the one you received as a W-2 worker.
- One year of related employment plus one year of training or education in the field. Documents that verify formal education are diplomas, degrees, certificates of completion, official transcripts, or industry-recognized credentials (licenses or trade certificates).
- Full tax year documents. These include one complete tax cycle or business accounts covering 12 months.
- Sufficient credit score. For conventional loans, the index should be at least 620, while FHA loans can be extended to people with 580 points.
- The debt-to-income (DTI) ratio should be below 45%. Although some lenders will agree to 50% in case you have substantial cash reserves.
- Down payment of up to 10%. Some types of non-QM loans require an even higher percentage.
- Cash reserves that equal several months’ worth of mortgage payments.
All these conditions, documents and proofs come as an addition to the standard paperwork that holds true for any person applying for a self-employed loan. Also, it is important to understand that what you have read is a garden-variety list of prerequisites for getting a self-employed mortgage. To learn what you are up to in your specific situation, you should consult competent experts in the mortgage industry.
How LBC Mortgage Can Help You
Having worked in the US mortgage market for 18 years, we have provided hundreds, if not thousands, of loans both to traditional W-2 workers and self-employed individuals across 11 states and nationwide. Our self-employed mortgage portfolio includes bank statement loans, asset depletion loans, 1099 loans, and P&L loans.
Contact seasoned specialists at LBC Mortgage to receive qualified advice regarding your unique self-employment use case and obtain necessary assistance along your home-owning journey.
Getting a Mortgage as a One-Year Self-Employed in a Nutshell
A self-employed American is a person who earns their main income from a business in which they own at least a quarter. They can't provide the pay stubs or W-2 forms needed for a standard mortgage, so self-employed loans are often the only option if they want to buy a house. To get such a loan, they should have at least two years of working as a self-employed individual. If you have only one year of self-employment experience, you can apply for a mortgage by proving two years of experience working in the same or a related domain. Some agencies agree to extend a mortgage on the condition that the self-employed applicant has one year of related work plus formally verified education or training in this field.
Since each lending agency has its own rules and policies, it is best to consult its personnel for qualified advice.