Buying a House When Self Employed

January 4, 2023

Self-employed individuals enjoy plenty of benefits. They typically get to work for themselves and have tax advantages that most W-2 wage earners don’t receive. However, being self-employed comes with some disadvantages when it comes to buying a house and qualifying for a mortgage. This article discusses buying a house as a self-employed individual and how to have the best home-buying experience this year.


Self-employment and buying a house


For most W-2 employees who have a salary and regular working hours, qualifying for a mortgage is relatively straightforward. You’ll typically need several months of recent paystubs, bank statements, and proof of additional assets like investment accounts or real estate owned. 


But self-employed individuals may not be able to produce these documents when working with their lender for a pre-approval.  


This can be especially problematic for self-employed workers who are just starting out and don’t have recent bank statements or paystubs to show their lender. Because of this, self-employed individuals are subject to a much more rigorous underwriting and approval process than their W-2 counterparts. 


Working with your lender


The good news for self-employed individuals is that most lenders consider the same requirements as they do for W-2 workers. Below are examples of the common metrics your lender will look at when approving you for a mortgage:


  • Credit score. Your credit score is typically the first thing that a lender will look at when approving borrowers for a mortgage. Credit scores are designed to show the lender your credit history and whether or not you have been able to historically pay back debts like car loans, student loans, credit cards, and more. A poor credit score indicates that you may not be able to repay your mortgage and makes it less likely the lender will approve you for a home loan.
  • Debt-to-income ratio. Your debt-to-income ratio (DTI) shows lenders how much you can afford to pay each month with your mortgage payment. Borrowers with a DTI of 43% or more may not be able to qualify for a mortgage with a traditional lender.
  • Employment history. Lenders want to see that you have a sustainable business that provides consistent income each month. They typically want to see 2 years of self-employment in order to consider you for a mortgage.


Knowing your options


Not all lenders are created equal. In fact, some lenders are known for working with self-employed individuals and may give better loan terms to those that qualify. Additionally, conventional loans are typically the hardest to qualify for and may not be the best choice for all self-employed individuals. 


The Federal Housing Administration (FHA) issues loans for new homeowners and those with less than stellar credit. An FHA loan may be a good option for self-employed workers who are just starting their businesses and don’t have established credit.


Final thoughts


Buying a house while being self-employed can be challenging for some prospective homeowners. This is why we highly recommend working with a local lender who has worked with self-employed individuals before and can provide you with the best advice on how to make your homeownership dreams a reality as a self-employed worker.