Help your self-employed clients secure mortgage in this guide. Explore strategies and documentation tips for handling mortgage for self-employed clients
If you're a mortgage broker working with self-employed homebuyers, you know that securing a mortgage for self-employed clients can present unique challenges. While the process is like that of traditional borrowers, there are key differences, especially when it comes to verifying income. Self-employed individuals often have more complex financial situations, which can make mortgage approval more difficult.
With the right approach, you can help your self-employed clients navigate these challenges and secure the mortgage they need. In this article, Mortgage Professional America will cover everything you need to know about offering mortgages to self-employed homebuyers and how you can best support your clients through the process.
Is it harder to secure a mortgage for self-employed borrowers?
A straightforward answer to this question is yes, self-employed individuals struggle more than the typical borrower. It can also be harder to get approved for a mortgage than if the homebuyer were employed. The reason for this is that banks and mortgage lenders might find it difficult to get a sense of your clients’ income.
“Self-employed borrowers typically face a more rigorous underwriting process than W-2 or salaried applicants,” Damon Germanides says. He’s a California-based mortgage broker and co-founder of Insignia Mortgage.
“This added scrutiny stems from several factors, including inconsistent or seasonal income, the need to reinvest in their business, and the disparity between what they consider their income and what is reported on their tax returns.”
For employed clients, they can simply show the bank or mortgage lender their proof of income in the form of pay slips. But for self-employed clients, home loan providers must look deeper into their finances to identify if their income is reliable and if they can afford mortgage payments.
Self-employed borrowers can be seen as risky
Banks and mortgage lenders often see self-employed homebuyers as being risky borrowers. This is because they look at tax returns first to determine your clients’ income.
It’s an open secret that most self-employed homebuyers lighten their tax burden by using deductions and write-offs to decrease their net income on paper. As such, mortgage lenders see them as having unpredictable incomes.
Still, being self-employed does not mean having an unreliable income. For instance, even employed homebuyers can quit their employment after receiving the mortgage. Keep in mind that mortgage lenders won’t be any less likely to pre-approve your clients' mortgage application. They simply need to be better organized.
Watch this video on how to get approved for self-employed mortgage:
How to prove income when self-employed for a mortgage
To prove income for a mortgage, your clients will need to provide a history of uninterrupted self-employment income for at least two years. Usually, banks and mortgage lenders will look for the following:
Employment verification
Employment verification will help your clients prove that they are self-employed. One way to get employment verification is to show letters or emails from these sources:
- Doing Business As (DBA)
- patrons and customers
- any business or state license
- insurance for your clients’ business
- licensed certified personal accountant
- professional organizations that can verify your clients’ membership
Income documentation
Your clients will be one step closer to getting approved for a mortgage if they have income documentation. Most banks and mortgage lenders ask for these documents:
- personal tax returns
- profit and loss statements
- bank statements
However, some home loan providers have mortgage offerings that won’t ask your clients for their tax returns.
“[We’re] seeing more boutique lenders offering loan programs tailored to the unique needs of self-employed borrowers—without requiring a full tax return analysis,” Germanides says. "These programs feature competitive rates, faster underwriting timelines, and a streamlined process that self-employed clients really appreciate.”
What is the maximum tenure for self-employed home loan?
Self-employed individuals can get home loans with a maximum repayment term of up to 30 years. This long tenure helps make monthly payments more manageable over time.
Do self-employed buyers pay higher mortgage rates?
No, not necessarily. In fact, there are certain scenarios where self-employed homebuyers will pay lower mortgage rates than employed homebuyers.
Take, for example, interest rates. These might be the same or sometimes lower than the interest rates of an employed borrower. Other factors that impact mortgage rates include:
- credit scores
- down payment
- length of the mortgage
How to prepare for self-employed mortgage applications
Here are some tips to tell your self-employed clients when preparing for their mortgage applications:
- build a strong credit score
- keep a healthy DTI ratio
- have consistent income
- organize income history
- consider a larger down payment
- prepare all financial documents
- try to save
Let's take a closer look at each:
1. Build a strong credit score
A strong credit score history is integral to most financial transactions, especially a self-employed mortgage. It gives banks and mortgage lenders a good insight into how well or how poorly your clients have dealt with debt in the past.
It also reflects their track record of making payments on time. This will demonstrate financial reliability to mortgage providers.
2. Keep a healthy DTI ratio
Your clients’ debt-to-income (DTI) ratio is the portion of their income that they put toward their debt payments every month. Mortgage lenders usually look at home buyers’ DTI to determine if they’ll have enough income remaining to make added mortgage payments.
Before applying for a mortgage, advise your self-employed clients to pay off credit card or car loan debts if they can. They should also consider paying off debt if their DTI is too high.
3. Have consistent income
Your clients will qualify for a home loan if they can prove that they have a steady source of income, whether as employed or self-employed individuals. This can give mortgage lenders the assurance that your clients will be able to manage their monthly mortgage payments without falling behind.
4. Organize income history
Most mortgage companies would want to see your clients’ income history for at least the past year. For that information, they will most likely review your clients’ tax returns. Ask your clients to change their approach so that their tax returns will show a strong net income. This is beneficial especially if they’re in the habit of using a lot of write-offs.
Bank statements are another way to prove your clients’ monetary source. Home loan providers will usually ask for up to 24 months' worth of bank statements to calculate your clients’ average monthly income. This is based on deposits made into their bank accounts.
5. Consider a larger down payment
Banks and mortgage lenders will generally see your clients as less of a risk if they make a larger down payment. By doing so, they’ll have less debt to repay. Their monthly mortgage payments will be lower. They will also have less money borrowed if they default.
Having a down payment of over 20 percent can also save your clients from having to pay private mortgage insurance (PMI). It can even give them access to better terms like lower mortgage interest rates. Overall, a larger down payment can make it easier for your self-employed clients to qualify for a home loan.
6. Prepare all financial documents
Your clients should be prepared with all their financial documents before applying for a mortgage. While requirements can vary, bank statements and tax returns are almost always essential. If these aren’t ready, encourage your clients to gather them early to avoid delays.
Since self-employed homebuyers tend to have more complex sources of income, they need to dig deeper. Connecting their accountant with the bank or mortgage lender is one way of doing it. They should also be prepared to provide additional proof of income.
“I always advise my self-employed clients to provide full documentation supporting their business deductions, along with copies of any 401(k) or pension contributions,” Germanides says.
“During early conversations, I also ask whether there were any one-time or non-recurring expenses that negatively impacted their income.”
7. Try to save
This is not a requirement but saving can help your self-employed clients when they apply for a mortgage. For instance, they can reduce the amount of debt they take on if they have enough savings. They’ll be able to put down a larger down payment.
Mortgage approval tips for self-employed clients
While being a self-employed borrower can be a little more complicated, you can still increase your clients’ chances of getting approved. The same is true for the type of mortgage loan that they can secure. Remember, what banks and mortgage lenders want to know is whether your clients will be able to repay the home loan.
So, to prove that they can, make sure that their financial documents are in order. Remember, the key to getting better chances for approval is to be organized. If you help them do that, they’ll be able to fulfill their dream of home ownership, just like any employed borrower.
With the right preparation, self-employed clients can show mortgage providers that they’re reliable and capable of managing a home loan. They might have to work a bit harder to show their income stability, but a clear financial picture will be beneficial. With extra effort, they’ll have a much better chance of getting approved.
Do you think that mortgages for self-employed borrowers get less approval than the traditional ones? Share your thoughts in the comments section below
