If you run your own business — or are a gig worker, free-lancer or independent contractor — financing a home could prove challenging. The reason? One of the first things lenders look for is a steady, verifiable income stream.  Without a regular paycheck or W-2 statement, it can be harder to prove how much you make, and how reliably you make it. That’s why most lenders have stricter rules for self-employed borrowers.

Just because you work for yourself doesn’t mean you’re guaranteed to have a hard time getting a mortgage, however. If you supply the right documentation to verify your income, do your homework and know what to expect, you can get approved for a loan.

How to get a mortgage when you’re self-employed in 5 steps

If you’re self-employed, the loan approval process will be somewhat similar to that of a W-2 salaried applicant: You’ll need to provide certain documentation to verify your employment income and prove to the lender that you’re a creditworthy fit for a mortgage in general and a certain sum in particular.

1. Determine if you’re classified as self-employed

If you own a business or have one partner, you will be considered self-employed. “A loan qualification is based on your taxable income shown on your personal 1040 federal tax returns,” says Anna DeSimone, a New York City-based personal finance expert and author of “Housing Finance 2020.” If earned income is verified by 1099 forms, rather than W2s, you’re likely to be considered a freelancer rather than a salaried worker bee.

Same if your return includes Schedule C, which is used “to report income or loss from a business you operated or a profession you practiced as a sole proprietor, to quote the IRS.   “Mortgage applicants with a 25 percent or greater share in a business or partnership are considered self-employed,” DeSimone adds.

Even when you have a second, part-time job with a W2, a lender will likely place more weight on your own gig — if it’s your primary source of income.

2. Prepare a pitch that explains your business

Depending on the nature of your work, your problem may not be so much the amount of your income as the reliability of it. While you’re not required to submit a full business plan, it may behoove you to prepare some documents that show the health of your industry and explain why your services are (and are likely to stay) in demand. Supply reports or tax returns that prove revenue growth and provide links to a professional website that helps an underwriter understand you’re serious and successful in your work.

If you have any contracts or written agreements indicating that you’re on retainer or guaranteed compensation for a period, include those. These details may convince a lender that you can make those monthly mortgage payments.

3. Gather necessary documents to show lenders

Your lender will need to see proof of income, just like they would for a salaried employee. It just that you may have to jump through more hoops. “Since self-employed people have non-traditional income structures, they may be required to show additional income documents when applying for the mortgage,” says Alan Rosenbaum, founder and CEO of GuardHill Financial Corp. in New York City.

Employment verification

  • A copy of your business license
  • Proof of business insurance (if applicable)
  • Articles of incorporation, LLC or partnership (if applicable)
  • State or federal permits
  • Any other documents that prove when you began operating

Income documentation

  • Two years of federal income tax returns (personal and business)
  • Recent business bank statements and profit-and-loss reports (aka income statements)
  • An itemized list of unpaid accounts receivable

4. Shop multiple lenders

You may want to seek a loan officer who has experience underwriting a self-employment mortgage. These officers may fight harder for your approval and be able to explain your qualifications to the underwriting department. Lenders who offer FHA loans may also be a better fit than traditional loans because they are guaranteed by the government and mitigate the risk to the lender.

A mortgage broker might be able to steer you towards lenders who specialize in self-employment mortgages.

5. Consider a non-qualified mortgage lender

A non-qualified mortgage (non-QM mortgage or loan, for short) is a type of non-conforming loan (see “What if I don’t qualify for a mortgage?,” below), one in which there are looser income and income verification criteria. Instead of using standard federal qualifications to ascertain your creditworthiness, the lender bases approval on alternatives — like your average bank statement balance over the last 12 to 24 months, for example. The lender would be willing to consider this balance as an earned-income equivalent, in place of pay stubs.

This sort of mortgage is often tailor-made for the self-employed or those lacking the proverbial bi-weekly paycheck. If you choose this type of mortgage, just be prepared to pay a higher interest rate and some additional closing costs. There may also be some features, like balloon payments or 30-plus-year terms, that often aren’t allowed on traditional, “qualified” mortgages.

How to calculate self-employed income for mortgage loans

You can use tax returns to quickly calculate your gross and net income for previous years. Business owners may also find a recent income statement useful for proving your current income stream. Self-employed people may also be allowed to use rental income or government payments as a part of their overall income.

Also keep in mind that loan applications for all types of self-employment are underwritten using a process DeSimone calls “add-backs,” whereby certain non-cash business expenses (like depreciation) are added back to your net income.

“The list of qualified add-backs is extensive and can make a difference in you qualifying or not,” DeSimone says.

Is it difficult to get a mortgage when self-employed?

It’s a common misconception that it’s always more difficult for self-employed applicants to get a loan than regular salaried or hourly workers with a W-2 from their employer, says Paul Buege, president and COO of Inlanta Mortgage in Pewaukee, Wisconsin.

“In all cases,” Buege says, “the basic criteria to get approved are the same: You need to have a good credit history, sufficient liquid available assets and a history of stable employment.”

Challenges can crop up, however, if you’ve only been working for yourself for a short time or make less money than lenders prefer — even if it’s just on paper. “Self-employed individuals often take full advantage of the legal tax deductions and write-offs that are allowed by the IRS; unfortunately, this means that they often show a low net income — or even a loss — on their tax returns,” explains Eric Jeanette, president of Dream Home Financing and FHA Lenders, based in Adelphia, New Jersey. “That can make it tougher to qualify for a mortgage.”

Complicating matters is that the rules for self-employed applicants can vary depending on the lender or loan type.

“This makes the process confusing, especially if you are shopping around and applying with multiple lenders,” says DeSimone. Often, “it lengthens the time you may have to spend trying to get approved for a loan.”

Loan types to consider when you are self-employed

Fortunately, self-employed borrowers are eligible for virtually all of the same mortgage types available to others. That means you can qualify for a conventional loan from a variety of lenders.

“You should be eligible for all available options, including both conforming mortgage programs by Fannie Mae, Freddie Mac, FHA and others, as well as non-conforming loans if necessary,” DeSimone says.

Fannie Mae and Freddie Mac: These are traditional loans that require a 20 percent down payment and may have fairly strict approval requirements. It’s not impossible for a self-employed person to get approved, but you may have more success after at least five years in business.

FHA: FHA loans are guaranteed by the Federal Housing Administration and only require a 3.5 percent down payment for most home buyers. The fact that the government is backing the loan may make some lenders more likely to approve this loan for someone who is self-employed.

VA: VA loans are available to current service members and people who were previously active-duty. Requirements depend on the time of your service. These loans can guarantee up to 100 percent of the loan, which would mean you’re not responsible for a down payment. If you have a VA home loan COE, your lender may find your application more appealing.

How to improve your chances of getting a mortgage when you’re self-employed

There are several ways to boost your odds of getting approved for a mortgage as a self-employed borrower.

Boost your credit score

Focus on improving your credit score and credit history. This requires making bill payments on time, paying down debt, correcting any errors or red flags on your credit reports and sticking to the limits on your revolving credit accounts.

Lower your debt-to-income ratio

Another way to increase your likelihood of funding is to lower your debt-to-income (DTI) ratio to 43 percent or less. This can be done by avoiding taking on any new debt, lowering your existing debt and paying it off more quickly than scheduled, and earning extra money.

Make a larger down payment

Forking over a higher down payment than the minimum required can help, too. “Down payment requirements for a bank statement loan were as low as 10 percent before COVID-19 hit,” Jeanette says. “But now, many lenders require 20 percent or more.”

Shop around for the right lender for you

Shopping around among different lenders and programs can yield the best opportunities. Focus on those that do business with independent contractors or sole proprietors.

“Work with an experienced loan officer who understands self-employed business records and documentation,” Buege says. “This person can help you present your business earnings and liabilities in a clear and understandable way that facilitates the approval process.”

Enlisting a skilled mortgage broker (again, one familar with self-employed applicants) can also up your chances.

What if I don’t qualify for a mortgage?

If you don’t get approved for a conventional mortgage, you can try applying for a non-conforming loan. “But these often come at a higher cost to the consumer, and not everyone can qualify,” says Buege, who adds that non-conforming loans can charge a higher interest rate and closing costs and stipulate less favorable repayment terms.

Alternatively, you could pursue a personal loan, although the maximum amount you can borrow likely won’t cover the cost of the home purchase.

If you’re trying to refinance and get denied, you could try applying for a home equity loan or home equity line of credit (HELOC) if you’ve built up enough equity in your property and meet the qualifications.