Self employed mortgage loans

Self-employed individuals may qualify for certain mortgage loans to help them purchase a home in New Jersey or another state. 

However, they must submit additional documents and meet a variety of special requirements that we will discuss below.

Everything You Need To Know About Self Employed Mortgage Loans In New Jersey And The Rest Of The United States In 2024

When you are self-employed and want to buy a home, you complete the same mortgage application as any other individual. That said, lenders consider factors like: 

• Credit score,
• Debt, 
• Assets, and 
• Income. 

The main difference is that when you have an employer, lenders will verify your employment status and income with them. 

On the other hand, since you are your own boss, lenders will require more documentation to verify your income and employment.

General Steps To Apply For Self-Employed Mortgage loans

To get a more complete understanding of how to prepare for the application process and improve your chances of success, we share some steps to follow:

1# Determine If You Need A Specific Mortgage For The Self-Employed

You are classified as self-employed if:

• You work for an entity that issues a Form 1099-MISC  instead of a W-2.
• Owns 25% or more of a company.
• Acts as an independent contractor or service provider.
• Your income is listed in the Schedule C section of your tax returns (this applies to sole proprietors).

2# Check The Necessary Requirements For Mortgages For The Self-Employed

Even though you are self-employed, you must meet the minimum mortgage requirements that apply to all other borrowers. 

Criteria vary between lenders, but the most commonly used factors to determine your financial health include:

Managing Your Company

Lenders want to make sure your business is financially stable. To do this, a lender can investigate:

• Location,
• Type of your company, 
• Product demand, and 
• Prospects for the company to remain financially sound and profitable.

Personal Income Vs. Business Income

If you use your business income to qualify for the mortgage, the lender will likely ask for evidence that you have healthy cash flow and are not in debt. 

Income Stability

A lender may consider you a higher risk of defaulting on your mortgage payments if your income tends to fluctuate from month to month. 

That’s why some lenders ask for additional proof that your business is stable enough to face months of lower profits.

Self-Employed Work Experience

A lender prefers that you have at least 2 years of experience generating income as a self-employed person. 

However, the approval process may be easier if you have been in business for at least 5 years and can demonstrate consistent or increasing profits.

3# Collect All Proof Of Self-Employment Income

Lenders will likely require the following documentation:

Personal Tax Returns

Although the 2 most recent tax returns are required, some lenders may accept only last year’s tax return.

Profit And Loss Statements (P&L)

This financial statement shows how much total profit you have made after subtracting your business expenses. 

Lenders expect these documents to show income similar to or higher than what you reported on your tax returns.

CPA Letters 

Lenders may request an explanatory letter from your certified public accountant (CPA) to verify your self-employment status.

Business Fund Documents Used For Down Payment

If you plan to use business funds for the down payment, you will need to provide:

• Bank statements, and 
• Company tax returns, along with a confirmation letter from your certified public accountant or tax attorney.

IRS Transcripts

You may need to sign IRS Form 4506-T -EZ to authorize the lender to obtain a transcript of your tax return.

Business Tax Returns

Business tax returns will depend on the structure of the company and the forms required vary depending on the type of business:

• Sole Proprietorship: Schedule C.
• Limited Liability Company (LLC): Form 1065 or Schedule C.
• C Corporation: Form 1120.
• S Corporation: Form 1120S Schedule K-1.
• General Partnership: Form 1065.

There may be exceptions to the tax requirements, but as we have seen, these requirements differ slightly from the general NJ mortgage loan requirements. 

4# Find Out How Much Of Your Self-Employed Income Is Eligible For A Mortgage

Many lenders use Fannie Mae’s Cash Flow Form 1084 to examine self-employed income. 

The amount of qualified income varies depending on whether your business is a sole proprietorship, a partnership, or a corporation. Lenders want to ensure the health of your business. 

5# Look For The Best Mortgage Company To Apply For Self employed mortgage loans

As a self-employed individual, you can access various types of mortgages available to traditional employees, such as conventional, FHA, VA, and USDA loans. 

However, it is important to ask lenders if they have experience evaluating self-employed income. 

6# Analyze Alternatives To Programs That Offer Self employed mortgage loans

If you are looking for self-employed mortgages due to insufficient income to qualify for a traditional mortgage, consider exploring non-qualified mortgage (non-QM) programs. 

With these programs, lenders evaluate your income using different methods, such as the average of your bank deposits or the value of certain assets.

Of course, opting for a non-QM loan may involve a larger down payment, higher closing costs on a home in NJ, and higher interest rates than a qualified mortgage. 

Is It Difficult To Get A Mortgage When You Are Self-Employed?

Getting a mortgage may be more complicated for those who are self-employed. 

This is due to the need to submit more documents compared to those who have had a salaried job with a Form W-2. 

Additionally, some lenders may not accept self-employed clients due to the stricter underwriting criteria they require.

What If I Have Been Self-Employed For Less Than 2 Years?

You can get a mortgage even with less than 2 years of self-employment. However, your business must be active for at least 12 consecutive months. 

Lenders will verify your most recent 2 years of employment, including:

• Salaried work, 
• Other forms of income in the same line of work, and
• Your professional and educational history to evaluate the future stability of your company.

What Income History Do I Need To Get A Mortgage As A Self-Employed Individual?

The longer you can demonstrate your earning history as a freelancer/self employed in the same industry, the better your chances of being approved for a mortgage. 

Tips For Obtaining A Mortgage For The Self-Employed

Review Your Debt-To-Income (DTI) Ratio

Your debt-to-income (DTI) ratio is the percentage of your net income that goes toward paying off your monthly debts.

A low DTI indicates healthy finances and suggests that you have enough money in your budget to afford a mortgage payment.

To calculate your DTI, divide your monthly recurring debt by your gross monthly income. Do not include bills such as utilities, food, or repairs, as these amounts can vary monthly.

If your DTI is over 50%, we recommend focusing on reducing your debt before applying for a mortgage.

Monitor Your Credit

The higher your credit score, the better your chances of approval and favorable loan terms.

Like your DTI, the lower your credit utilization ratio, the better it will be for your credit score.

Keep Business Expenses Separate

Charging business purchases on your personal credit cards can hurt your mortgage application if your credit utilization is high.

Although it can be difficult to keep business and personal expenses completely separate on your credit report, it’s a good idea to try. 

Explore Other Options

If you can’t get approved for a conventional mortgage loan, consider other options. 

• FHA or VA loans: These mortgages require down payments and low credit scores.
• Bank statement loan: Allows applicants to request a loan without submitting documents proving income. Instead, lenders review 12 to 24 months of bank statements.
• Joint Mortgage: Applying for this with a co-borrower with Form W-2 can improve your chances of approval.

Prepare To Make A Larger Down Payment

It is possible to get a mortgage loan with a small down payment. Of course, making a bigger down payment can convince lenders to approve your mortgage and offer a lower interest rate. 

Find A Co-Signer Or Co-Borrower

If you think your employment status and income history may make it difficult to get approved for a mortgage, having a co-borrower or co-signer may be beneficial. 

However, the ideal candidate must have sufficient income and a good credit score.

Compare Loan Options And Find The Best Self-Employed Mortgage Lenders

When looking for a mortgage as a self-employed person, look for lenders with experience in this area. Therefore, to find the best lender, we recommend the following:

• Search online and read reviews from other self-employed borrowers.
• Ask for recommendations from friends, family or colleagues who have gone through the process.
• Contact several lenders and ask about their experience with self employed clients.
• Compare mortgage rates, fees, closing costs and terms.
• Work with an expert who understands the unique challenges of self employed mortgage loans. 

If you need help understanding these real estate processes, our NJ real estate attorney can advise you. Call us today.

Get Pre-Approved For Your Home Loan

Before you start searching for a type of home in New Jersey or elsewhere, it is recommended to get pre-approved for your mortgage loan. 

Once obtained, you will receive a communication detailing the estimated loan amount and the applicable rate.

Disadvantages Of Obtaining A Mortgage As A Self-Employed Person

The main disadvantages of getting a self-employed mortgage are:

• Difficulty verifying income: Lenders may consider self-employed individuals less ideal due to difficulty verifying their income.
• Impact of business expenses: Self-employed people often have business expenses that reduce their taxable income. This can cause lenders to question your ability to afford a mortgage.
• Higher down payment requirements: Banks may require a lower loan-to-value (LTV) ratio for self-employed individuals, which means the need for a larger down payment.

Why Getting A Mortgage Can Be More Difficult As A Self-Employed Person?

Getting a mortgage as a self-employed individual can be complicated due to several factors:

• Irregular Income: Lenders prefer stable income, which can be difficult to prove if you are self-employed. 
• Affordability: Lenders evaluate whether you can afford mortgage payments even with interest rate increases. 
• Lender choice: Some lenders tend to be more cautious when granting mortgages to the self-employed.
• Income complexity: Certain lenders use automated algorithms that may not be suitable for self-employed income.

Despite these challenges, obtaining a mortgage as a self-employed person is possible, but it is necessary to consult with an expert. 

What Happens If I Don’t Qualify For A Self-Employed Mortgage?

If you as a self-employed person do not qualify for a traditional mortgage, consider a non-conforming loan, although it may be more expensive and not everyone will qualify. 

You can also explore a personal loan, but it may not cover the full cost of the home. 

In the event that your property has sufficient equity and you have been refused refinancing, a good option could be:

• A home equity loan, or
• A home equity line of credit (HELOC).

Do Lenders Offer The Same Policies For Self-Employed Mortgages?

Policies vary depending on the lender and the type of US mortgage loan being obtained. 

Therefore, comparing prices can be complex if you work on your own. In these scenarios, it is important to have an expert in the area, our lawyer Carolina T. Curbelo will be able to help you with this.

Do I Have To Declare Income If I Am Self-Employed?

Fannie Mae and Freddie Mac indicate that, for conventional loans, it is not necessary to report income if it is not used to qualify for the mortgage. 

In other words, if you qualify with just Form W-2 income and personal savings, the lender may ignore self-employment income. 

This also applies to: 

• Retirement income, 
• Social Security, 
• Investments, and
• Pensions.

These rules apply to conforming mortgage loans, so guidelines for other mortgage loans may vary.

Frequently Asked Questions About Self employed mortgage loans

What Are Self-Certified Mortgages?

Self-certified mortgages were designed for self-employed people, who could declare their income without needing proof. 

However, they were banned in 2014 due to concerns about borrowers’ ability to pay. Now, self-employed people must apply for mortgages in the conventional way. 

Are Mortgages For The Self-Employed More Expensive?

Not necessarily, but get the best deal possible by getting pre-approved quotes from several lenders and comparing loan estimates.

What Happens If I Have gaps In My Work History?

Significant gaps between contracts can sometimes hinder a mortgage loan application. 

As a general rule, any interruption longer than 8 weeks could be a problem, but some lenders may consider approving an application in certain circumstances. 

Why Choose Curbelo Law To Guide You With Your New Jersey Real Estate Legal Needs?

If you are self-employed in New Jersey, you will surely face additional obstacles when trying to obtain a mortgage loan. 

This is because the necessary documents can be complex, especially if it is the first time you are applying for a mortgage.

Whether you are a first-time buyer or looking for financing for any type of home in this area, our real estate professionals are here for you.