I’m Self-Employed. Can I Still Get a Mortgage?

In 2015, Pew Research Center reported that self-employed people and the workers they hired accounted for about 30 percent of U.S. jobs. That turns out to be more than 29 million of you who are willing to take the risk of working without a corporate safety net. It would be nothing less than a denial of the American dream if self-employed borrowers were barred from buying their own home.

Relax. The self-employed can indeed get a mortgage, although it requires a little more paperwork. The following discussion describes changes the Federal National Mortgage Association (affectionately known as Fannie Mae) made in August 2015 and is not current application guidance.

Fannie Mae Loans for Self-Employed Borrowers

Who exactly is Fannie Mae? She’s a government-sponsored enterprise (GSE), that buys up mortgages, pools together and sells bonds backed by the pools. Many lenders use Fannie Mae to offload the risk of holding onto a mortgage. In other words, when Fannie makes it easier for the self-employed to get a mortgage, lenders are more willing to provide mortgages to the self-employed. Makes sense, right?

Well, what did Fannie do last August? It reduced the documentation requirements for three groups of borrowers:

1. Self-employed borrowers with less than two years of federal tax returns. Now, if you have only the latest year’s tax return, you can supplement it with a monthly income statement that shows your cash flows for at least the last 12 months
2. Self-employed small business owners who take little or no money out of their businesses. You’ll need to show you have access to your business income, via a K-1 filing or letter of incorporation. As above, you’ll need to show adequate cash flows to make your mortgage payments.
3. Salaried borrowers who also work at a self-employed second job. You’ll no longer have to provide proof of income from your self-employed job, i.e. you don’t have to cough up your tax returns as it relates to your non-salaried income.

What self-employment changes is the paperwork, not your odds. Expect to document a two-year history in the same line of work, provide two years of personal and usually business tax returns, and have your qualifying income figured as an average across those two years rather than from your best recent month. If that average is trending downward, the lower figure is generally the one that counts. Fannie Mae allows a one-year history in limited circumstances, so ask before assuming you have to wait.

Loanatik uses advanced systems to gather the information needed to quickly approve a loan to the self-employed. The more data we collect online, the fewer hassles you’ll have to deal with. We can prepare various documents, such as a cash flow analysis and written evaluation of your income (personal and business), required by Fannie Mae. We may be able to streamline document collection, but approval and timing depend on complete documentation and underwriting.

FHA-Insured Loans

What if you want an FHA-insured loan? If you’re worried that these aren’t available to the self-employed, well turn that frown upside down. FHA-insured loans can offer lower down-payment options for eligible borrowers, while mortgage interest rates are set by lenders and vary with the borrower, loan terms, and market conditions. Many lenders, including Loanatik, offer FHA-insured loans, so when the FHA loosens the approval requirements for the self-employed borrowers, the effect ripples through the entire market.

FHA-insured mortgages to the self-employed may involve different documentation requirements depending on the borrower’s circumstances. A borrower with less than two years of self-employment may be considered when the applicable FHA income-history and stability requirements are met, subject to full lender underwriting and all other FHA eligibility requirements. You’ll also want to prove that your income from self-employment hasn’t declined by more than 20 percent over the last couple of years. Such a decline doesn’t automatically disqualify you, but it does make it harder to get a mortgage.

It’s not surprising that you’ll need to produce certain documents to qualify for an FHA loan, including tax returns, profit & loss statements, maybe even a balance sheet (but not if you are filing Schedule C income). However, you don’t have to produce a business tax return if:

• your individual return shows that your self-employment income rose over the past 2 years,
• the mortgage-closing money doesn’t stem from a business account, and
• the FHA loan is not for a cash-out refinance.

The good news is that Loanatik can obtain the necessary tax information without signed tax returns. You see, there are several IRS forms, such as online copies of your tax return or tax transcript, that provide the necessary information. The result: less red tape for you and a quicker decision by Loanatik.

Two things to remember:

1. Conversion from W2 to 1099 makes you self-employed, even if it’s for the same firm.
2. Even if your loan isn’t eligible for Fannie Mae approval, Loanatik may still be able to consider it under one of our other loan programs, subject to credit approval.

Corey Schwartz, our CEO and founder, is an entrepreneur. He constantly seeks better ways to help eligible borrowers, especially self-employed borrowers and fellow entrepreneurs, pursue mortgage options in the states where Loanatik is licensed. Don’t wait – apply today for a Loanatik mortgage and be prepared for how easy we make the process.