In general, lenders are concerned whether all applicants, including self-employed workers, can consistently repay their loans. They'll need to see that your income is high enough to pay for your mortgage, that it's likely to remain high, and that you have a good track record of repaying your debts. This is easier to do when income is steady and predictable, which isn't always the case for self-employed people.

 

Proving the stability of your business requires documentation, including evidence of work, payments and activity supporting business operations, such as a business website.

Lenders typically look at your income for the past two years – and for the self-employed, it will be your net profit, not your gross income. That is, they will look at the total income you have left after your deducted expenses.

 

If you earned more in Year 2, they will take an average of the two years. If you made less in Year 2, they will go by the lower-earning year. Lenders might be wary if your income drops significantly, so expect to provide an explanation if that's the case.

Stable or increasing income. Some fluctuation is acceptable, but that's why lenders like to see two full years of tax returns. Lenders are looking for the worst-case scenario, so they will probably consider the lower of the two years when crunching their numbers. Be mindful that significant decreases in income from year to year might raise additional questions during underwriting because the lender may see that as a sign that your business is declining. 

 

Consistent work. Ideally, you should have at least two years of self-employment income in the same industry. If you're newly self-employed, some lenders will make an exception if you have one year of self-employment tax returns plus W-2s from an employer in the same field. 

 

Good credit. You'll need a track record of repaying your debts. Foreclosures, delinquencies, collections, repossessions and bankruptcies increase risk for the lender. Lenders will review the type, age, use, status and limits of your revolving credit accounts as well as how often you applied for credit in the last year. 

 

Low debt-to-income ratio. Lenders typically look for a debt-to-income ratio – the percentage of your monthly income you put toward paying your debt – to be 43% or lower. If your debt payments are perceived as unmanageable for your income, you might not qualify for the amount you need to purchase a home or receive an offer at all.

You'll also want to be careful if you're self-employed and tend to deduct a fair amount of business expenses. This can hamper qualification since mortgage underwriters typically look at income after expenses. "The problem that we run into is a self-employed borrower can write a lot of things off," says Sean Cahan, president of Cornerstone First Mortgage in San Diego. So those savvy deduction moves that help at tax time could end up reducing your bottom line, which can then impact the DTI.

 

Cash reserves. Your mortgage payment is due every month, even when work has dried up or if your business goes through a seasonal slump. Lenders may want to see that you have an emergency fund to get through months when you're not earning as much. But again, that doesn't mean self-employed borrowers are held to a higher threshold.

 

Significant down payment. A hefty down payment of 20% or more can offer more assurance to lenders, but down payment requirements for self-employed workers with good credit and enough income are usually no different from other borrowers. However, a larger down payment can be helpful. "Putting more money down will help your DTI ratio," says Cahan. But if the loan is not likely to be approved because of other challenges, a larger down payment probably won't tip the scales to an approval.

Many lenders will require income verification early in the mortgage timeline and then again just before closing. Although requirements will vary by lender, be prepared to submit:

Some lenders may require further documentation, such as statements from your accountant and clients. Be sure your documents are up to date and organized before you submit.