Home loans for the self-employed have earned a reputation for being difficult since the housing crash. This is because many self-employed borrowers don't show sufficient income, if the lender's definition of “income” is on your tax return. Yes, it may be more difficult to obtain a mortgage if you are self-employed. You'll need to provide more documentation than someone who has had the same W-2 job for several years.
Some lenders don't work with self-employed people because of increased subscription requirements. Keep in mind that the longer you've been self-employed, the better your chances of getting a mortgage approved. New businesses often fail, so if yours hasn't existed for a long time, a lender may be hesitant to take a risk with you. This makes it more difficult to qualify for a mortgage, as it impairs the debt-to-income ratio.
The key is to show a net income, after cancellation, that meets the debt-to-income ratio preferred by lenders, which generally ranges from 36% to 43%. Some lenders may worry that they won't earn a stable enough income to make their monthly mortgage payments, and others may simply not want to deal with the additional documentation that may involve granting a mortgage to a self-employed person. You'll need to provide certain documentation to verify your work income and show the lender that you're eligible for a mortgage. Non-QM loans do not meet qualified mortgage standards set by the government and are sometimes also referred to as alternative or non-income verification mortgages.
Whether you're self-employed or an employed borrower, having the time and space you need to prepare to apply for a mortgage will make the process faster, easier and much less stressful. Keep in mind that FHA loans come with other significant costs, including a large initial mortgage insurance premium, so keep it as an alternative option if you can't get approval for a conventional self-employed mortgage. Obtaining a joint mortgage with a co-borrower who is employed with Form W-2, such as a partner, spouse, or trusted friend who will share ownership of your home, is another way to improve your prospects of getting approved for a mortgage if you are self-employed. While Rocket Mortgage's down payment requirements don't change as a result of self-employment, some mortgage lenders may try to mitigate your risks by having you make a higher down payment, resulting in a lower loan-to-value (LTV) ratio.
If you've been told that you don't qualify for a traditional mortgage or that you don't want to have to worry about the required documentation, it may be worth exploring an unqualified (non-QM) mortgage. You can also consider working with a mortgage broker, whose job is to learn the ins and outs of each lender's policies regarding loans to self-employed workers and whose relationships should help you move forward with your mortgage application. The fewer monthly debt payments you have when you start the mortgage process for the self-employed, the easier it will be for you to make your mortgage payments. However, last month, the availability of mortgage credit increased for borrowers in general, according to the Mortgage Bankers Association.
