The sheer number of self-employed workers is rising steeply. Even before the pandemic, 34% of the workforce was part of the so-called “gig economy” and 67% of employees were considering leaving their full-time job to freelance.
The reality is that mortgage lenders evaluate self-employed candidates the same way that they do everyone else – including W-2 employees – in terms of acceptable credit score, an ideal debt-to-income ratio, and stability of income. In the case of self-employed borrowers, asset and income account statements can be used to verify worth.
Self–employed borrowers are able to apply for all the same “traditional” loans. The main difference between self-employed and a W-2 mortgage process is the documentation lenders will require to support the application. At the end of the day, it’s the stability and viability of a person’s income and business (since this revenue can fluctuate) that lenders consider. Proving valid cash flow as a business owner, contractor, freelancer, or gig worker just requires a bit more paperwork.
Most mortgage lenders will require at least two years of steady self–employment income before a borrower can qualify for a mortgage loan. There are some exceptions to the two–year rule.
Someone can qualify with just one year of self–employment if they can show a two–year history in the same line of work.
Self–employment income that is eligible for mortgage financing include: Business owners, Freelancers, those who do contract work or seasonal work and those who have side work or “gigs.”
Asset-Based Mortgage
One mortgage product that is available to the self-employed is the Asset-Based Mortgage or ‘asset-depletion loan’. Borrowers are qualified based on up to 100% of their liquid assets divided by the term of the loan.
Another advantage is that no tax returns are required. Self-employed workers tend to use a great number of business expenses to “write off” and reduce taxable income on tax returns.
A bank statement loan lets borrowers qualify based on total funds coming into their accounts rather than tax returns. Additionally, with asset loans, Debt to Income (DTI) Ratio is not calculated.
With this type of lending, self-employed borrowers will be borrowing against their assets. The loan amount granted is based on a percentage of the assets’ value. Borrowers can use 70% of what is in their retirement and investment accounts and 100% of their liquid assets.
While asset-based loans typically have higher interest rates, self-employed and small to mid-sized businesses that are growing rapidly can benefit from these types of home loans as it doesn’t touch any working capital.
Liquid assets that serve as collateral are checking and savings accounts, certificates of deposit (CDs), money market accounts, mutual funds, stocks, and bonds.
Traditional Mortgage Options
While an Asset-Based Mortgage is one option, most self–employed borrowers have no issues qualifying for a traditional mortgage that offers lower interest rates. In these cases, self–employed borrowers have to provide proof of the following:
- Two years of personal tax returns and/or business tax returns
- DTI below 50%
- 620 minimum credit score
- 3% minimum down payment
- Year–to–date profit and loss statement (P&L)
- Loan amount within conforming loan limits
- With good credit and the ability to make moderate down payment of 10–20%, conventional mortgages are usually the better option.
There are also FHA, VA and USDA loan options available for the self-employed that offer lower down payment options.
Since every lender has their own qualifications on how to approve self-employed mortgage borrowers, it can be tricky to find the right fit. Rules vary based on lender and type of loan.
HomeLander Mortgage will be there every step of the way. Schedule a call to begin the process at www.homelandermortgage.com
