Looking to Purchase a Home and Self Employed (1099)?

If you have problems with showing income or working receiving 1099 paperwork, this article is for you.

Self-Employed Mortgage Loan | Requirements 2024

By: Maggie Overholt Updated By: Ryan Tronier Reviewed By: Paul Centopani

January 2, 2024 - 18 min read

Self-employed mortgage loans are common

Self-employed mortgage loan borrowers can apply for all the same loans “traditionally” employed borrowers can.

You’re held to the same standards for credit, debt, down payment, and income as wage-earning applicants. The part that can be tough is documenting your income.

Proving your cash flow as a business owner, contractor, freelancer, or gig worker can require more paperwork than for W-2 employees. As long as you meet loan guidelines and can document steady, reliable cash flow, being self-employed should not stop you from buying a home or refinancing.

Can you get a mortgage while self-employed?

Absolutely, being self-employed doesn’t mean you’re automatically disqualified from securing a mortgage.

In fact, there are various loans for self-employed individuals designed specifically to meet their unique needs. While obtaining a self-employed mortgage loan may require a bit more documentation and scrutiny, it’s certainly possible.

Self-employed home loans could also require more substantial cash reserves or a larger down payment to offset the lender’s risk, given that self-employed income can sometimes be inconsistent.

If you’re aiming for the best mortgage terms, it’s advisable to work with lenders who specialize in self-employed loans. These financial institutions often have more experience and flexibility in dealing with income that may not be as steady as that of a W-2 employee.

Self-employed mortgage loan requirements

Most mortgage lenders require at least two years of steady self-employment before you can qualify for a home loan. Lenders define “self-employed” as a borrower with an ownership interest of 25% or more in a business, or one who is not a W-2 employee.

However, there are exceptions to the two-year rule:

• You might qualify with just one year of self-employment if you can show a two-year track record in a similar line of work. You’ll need to document an equal or greater income in the new role compared to the W2 position

• Some lenders will even count one year of related employment plus one year of formal education or training as an acceptable work history

If you’ve been self-employed for less than one year, you’re not likely to qualify for a home loan.

Loan program requirements

In addition to proving their employment history, self-employed borrowers need to meet standard loan program requirements. Guidelines vary by loan type (more on this below). But in general, you should expect a lender to look at the following criteria in addition to your employment and income:

• Credit score

• Credit history

• Current debts (for your debt-to-income ratio)

• Liquid savings and assets (for your down payment and closing costs)

Lenders will scrutinize both the property you want and your personal finances. The type of residence (house, condo, etc.) and its intended use (primary residence, vacation home, investment property) will impact your rate and the mortgage loan types you qualify for.

FHA loans for self-employed

The Federal Housing Administration insures FHA mortgages. These loans are often best for low-credit and first-time home buyers due to their lenient requirements.

To qualify for FHA financing, you need only:

• 580 credit score or higher

• 3.5% down payment

• DTI below 50% (varies by lender)

• Plan to use the property as your primary residence

• Loan amount within current FHA loan limits

For self-employed borrowers, FHA also requires a two-year self-employment history or one year of self-employment plus two years in a related role with similar income. If you have one year in a similar role and one year of formal training or education, FHA may count this as an acceptable two-year history.

The FHA typically requires two years of personal and business tax returns to document self-employment income.

However, you may not have to show business tax returns if:

• Your personal returns show increasing income over the past two years

• Down payment and closing costs are not coming from a business account

• Your loan is not a cash-out refinance