Self Employed Mortgage Guide

The Definitive Guide to Mortgages for Self Employed

The self-employed workforce is growing at breakneck speeds. In fact, according to the FreshBooks 2018 Self Employment Report, 15 million Americans are currently self-employed. And by 2020? A whopping 27 million more will join them.

Unfortunately, traditional mortgage lending hasn’t quite caught up yet. Most lenders still require W-2s and employment verification (but not us!) in order to process their loans — things that self-employed workers simply can’t produce. Worse yet, some lenders that do accept self-employment income to qualify borrowers only offer sky-high interest rates that just aren’t logical (or fair).

Enter self-employed mortgages: loan products designed just for the growing self-employed borrower in mind. Are you self-employed and looking to buy a home? Then learn more about our flexible loan options now.


What Is A Self-employed Mortgage?

Self-employed mortgages are loans specifically for borrowers with non-traditional income — ones without W-2s, paystubs or employers to verify their paychecks. Sometimes self-employed mortgages are referred to as “bank statement loans” because they use a borrower’s bank statements to qualify them for the loan (rather than W-2s and tax returns). These bank statements allow us (the lender) to evaluate the borrower’s cash flow over time, as well as help determine how much the person can safely afford in terms of a monthly mortgage payment.


Common Misconceptions About Self-Employed Mortgages

There are many misconceptions surrounding self-employed mortgages — often regarding how much they cost, how hard they are to get and what they can be used for.

Some of the more common myths include:

  • Myth: They come with higher interest rates.
    Though self-employed loans might have slightly higher interest rates than conventional loans, as long as you have good credit, a solid down payment and can show consistent income, it shouldn’t be a drastic difference by any means. We set your rate based on the level of risk you pose, so the more you can boost your credit and the more cash you can put down up front, the better the rate you will receive.
  • Myth: You can’t use them to refinance.
    As with any other mortgage product, you can absolutely use self-employed mortgages to refinance your existing home loan. You can even use them to cash in on a portion of your home equity should you need access to quick cash for medical costs, renovations, college tuition or other upcoming expenses.
  • Myth: They’re very difficult to come by.
    Self-employed mortgage loans actually come with a quite simple application processes. Not every lender offers these loans though, so make sure you do your research and find a mortgage company that specializes in self- employed products (hello, Sunray!) before moving forward.
  • Myth: They’re only available for very small loans.
    Many lenders that offer self-employed loans offer jumbo-sized ones as well. These go up to $3 million or more and can be great for investors and commercial buyers.

Before you apply for a self-employed mortgage, make sure you know what you’re getting into, and if you have questions, concerns or just aren’t clear on something, reach out to a Sunray loan expert for clarification.


Who Are Self-employed Mortgages Good for?

Small business owners, freelancers, gig workers and 1099 contractors can all use self- employed mortgages in order to buy a home. They are also a great refinancing option for homeowners who have quit the traditional workforce and branched out on their own since buying their property.

Here are some of the self-employed professionals who often gravitate toward these mortgage loans:

  • Doctors and lawyers
  • Architects and real estate developers
  • Independent consultants
  • Professional investors and investment advisors
  • Oil and gas business owners
  • Small business and restaurant owners
  • Real estate agents, brokers, investors and home inspectors
  • Freelance designers, web developers, writers, social media marketers and other creatives
  • Landscapers, handymen and contractors
  • Drivers, taxi operators and couriers
  • Chiropractors, personal trainers, nutritional coaches and fitness instructors
  • Tutors, daycare providers and babysitters
  • Interior decorators, wedding planners and event coordinators

Generally, any person who doesn’t have a traditional 9-to-5 job or W-2 income can use a self-employed mortgage to purchase or refinance a home.


How Long Must I Be Self Employed to Qualify?

Most lenders require you to be self-employed for at least two years. This allows them to fully evaluate your income and any seasonal trends in cash flow. It also gives the lender confidence in your ability to repay your loan should they grant you one.

With that being said, every lender has its own unique requirements for self-employed loans. While some may ask for two years of history as a self-employed worker, others require only a few months. Make sure to ask a Sunray loan expert about the specific employment requirements you’d need to meet before applying.


What Kind of Documentation Will I Need to Apply?

Since most self-employed workers take lots of deductions, their income doesn’t look so great on paper — and their tax returns don’t really reflect the true amount of money they’re working with. Fortunately, with self-employed mortgages, you don’t need to provide tax returns in order to show your income.

Instead, you’ll need the following documents to apply for your self-employed loan:

  • 12 to 24 months of business or personal bank statements
  • Any 1099s, if your clients have provided them
  • Documentation of any 401K accounts, investments, stocks, bonds, etc.
  • Explanation of any larger-than-average deposits
  • Proof of cash or liquid reserves (enough to cover the down payment, closing costs and a few months of your estimated mortgage payments)

In some cases, we may ask for a copy of your professional license, a letter from your tax preparer, or a profit and loss statement for your business — but these aren’t must-haves for most applications.

If you’re applying for your loan with a significant other or co-borrower, you will need to provide their financial documentation as well. If they work a traditional 9-to-5 job, their last two W-2s and an employment verification letter should suffice. Talk to a Sunray loan expert to find out what specific types of documentation your co-borrower will need to provide.


How Do I Prep My Finances to Ensure I Get Approved?

With any loan, your credit score is going to play a big role, so start working on your credit early. Pay your bills on time, every time, and don’t rack up high balances on credit cards or loans. You should also settle any collections that may be in your name and report any errors that appear on your credit report. Doing so can greatly improve your score.

When you know buying a home is on your radar, you should also avoid opening any new accounts, taking on any new loans or making any big-ticket purchases. These can all ding your credit score and make it harder to qualify for a mortgage.

Finally, saving up a decent-sized down payment can also help you as a self-employed borrower. The more money you have to put down, the less risk you are to a lender — and the better the rate we can give you. If possible, try to save up a 20 percent down payment. This can help you avoid private mortgage insurance and secure you the best possible interest rate.

The Final Word

As with any mortgage loan, it’s important to know what you’re getting into. Always talk to a Sunray loan expert, get a quote, and understand the full scope of rates, fees and costs before moving forward. If the numbers don’t quite align with your goals just yet, consider working on your credit, saving up some more cash and trying again in six months to a year.

To learn more about self-employed mortgages or to get a quick quote for a self-employed mortgage, contact a Sunray Mortgage loan expert today. We’re here to help.

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