Do you make your living being your own boss and don’t know how it will impact the type of mortgage you can secure? The experts at Champions Mortgage, the most trusted mortgage broker in Houston, explain everything you should know about self-employed home loans. This guide reveals what you’ll need to secure a loan, the pros and cons of these home loans, and much more.

Mortgage Options for Self-Employed Borrowers

If you want to buy a property as someone who is self-employed, you have a few options when it comes to getting a home loan. Below, we discuss the most common types of loans you can apply for. Discover the basics of each one as well as the benefits and drawbacks. 

Conventional Mortgage

Lenders offer conventional mortgages with either fixed or adjustable interest rates for up to 30 years. The government does not back these loans, so lenders face a higher risk that comes with handing these loans to buyers if they’re unable to pay. However, borrowers typically need to have their finances in order before they can obtain a loan from a private lender, including: 

• A good credit report
• Funds for a down payment up to 20% of the price of the home
• A favorable debt-to-income ratio

FHA Loan

Anyone seeking self-employed home loans can use an FHA loan from the Federal Housing Administration. These mortgages are similar to conventional loans with either fixed or adjustable interest rates and a term of up to 30 years. However, lenders offer more flexibility regarding the down payment and require that borrowers put down a minimum of 3.5% of the property’s total cost. 

VA Loan

If you’re a veteran who is now self-employed, you can apply for a Veterans Affairs loan. This home loan is only available for eligible current and former military members and their spouses. The benefits of these loans include lower closing costs and interest rates. A VA loan also requires no down payment. 

USDA Loan

The U.S. Department of Agriculture provides loans to prospective homeowners living in select rural regions. If you’re self-employed and looking to settle down in a qualifying area, you may be able to obtain this type of mortgage. These self-employed home loans prove especially helpful if you have a lower business income. 

To see if you qualify for a USDA loan, visit the Department of Agriculture’s website. You’ll find a tool available for you to calculate self-employed income for a mortgage according to loan requirements. 

Bank Statement Loan

Finally, you have the option to secure a bank statement loan, and understanding the bank statement mortgage loan requirements is crucial in this process. Unlike other mortgage processes, lenders don’t need a tax return or other proof of income to grant this type of loan. They instead look at your bank statements to get a sense of your expenses and income. Keep in mind that while this loan suits many who are self-employed, it tends to come with higher interest rates. 

Applying for Self-Employed Home Loans: Documents You Need

The application process will vary slightly depending on the type of loan you plan to obtain. In general, lenders will need the following information:

• Tax returns: Self-employed borrowers will need to submit business and personal tax returns. 
• List of current debt obligations: Provide any debts you owe and the monthly payments you put toward them. 
• Bank statements: You’ll have to provide a few months to up to two years of statements. 
• Proof of assets: To confirm your funds for a down payment, lenders need to review investment or savings accounts. 
• Additional income: Provide any documentation that confirms you have other sources of income, such as alimony payments. 
• Current housing payment: Lenders need to see details about your current mortgage or rent check. 
• Employment verification: Prove your self-employment with a business license or membership in a professional organization. 

How To Secure a Mortgage

The application process is extensive, but prospective home buyers need more than just the necessary documents to obtain self-employed home loans. During tumultuous times when experts keep seeing first-hand how the pandemic affected the housing market, lenders want to make sure they give loans to worthy candidates. The ideal borrower will meet the following criteria to obtain a mortgage. 

Stable Income

Being self-employed can present challenges if your income changes month to month. Lenders will look at your overall employment history and determine how much your business earns in the long run. You’ll want to not only prove you have a steady stream of income but also show growth over time. 

A decline in your income will concern lenders and make you a riskier candidate. Before applying for any self-employed home loans, make sure you have an idea of your business performance. 

Great Credit Score

Failing to pay off debts or past foreclosures can severely impact your credit score. Lenders will see low scores and hesitate to approve that borrower because of their questionable history. They want to protect their loan by granting it only to buyers with a clean credit history. 

You can improve your credit score by paying loans on time, getting yourself out of debt, and avoiding opening any new accounts. 

Sufficient Funds for a Down Payment

So you want to get a conventional mortgage as a self-employed borrower. The lender needs to see that you have enough funds available for a 20% down payment as well as plenty of money in the bank to fall back on. The ideal home loan candidate will have a sizeable emergency fund in the event their income changes, or they need to cover expensive repairs within the home. 

Lenders prefer borrowers who can pay their mortgage even when the unexpected happens. 

Contact a Lending Specialist Near You

If you want to buy a home in the greater Houston area, Champions Mortgage is here to help you. Our team has years of experience and understands the ins and outs of self-employed home loans. Reach out to our experts for an outlook on mortgage rates in 2024 and learn tips that will help you lock in a loan that works for you. 

Contact us at (281) 727-2500 or email info@championsmortgageteam.com for more information regarding home loans.