How to Get a Mortgage When You’re Self-Employed

One of the biggest challenges faced by someone who is self-employed is getting a mortgage loan. Prior to the financial crisis of 2008, it was possible to solve this problem by getting a “no-doc” loan or some similar loan — and pay an outrageous interest rate for the privilege. Even before the financial crisis, if you wanted a good mortgage rate, you had to jump through hoops as someone self-employed. Now, it is still difficult to get a mortgage loan with an income primarily from self-employment. However, it is possible. I know; I’ve done it.

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Proving Your Income

One of the biggest reasons that it can be difficult to get a home loan when you are self-employed is due to the fact that a mortgage lender is looking for evidence of a steady income. A self-employed person can’t bring in pay stubs and W-2s to show that he or she earns a steady wage.

Instead, you have to show your tax returns and maybe your 1099 Forms. However, a mortgage lender knows that your income is likely to vary from month to month when you are self-employed. Even though your yearly income might be sufficient, the concern about fluctuations in monthly income can cause mortgage lenders pause when approving your application.

Pay Yourself a Regular Salary

A strategy that can help you overcome this state of affairs is to pay yourself a regular salary. Even home businesses can be structured with payroll so that you are receiving a regular salary. This shows up in your payroll/accounting software, and you can even print out pay stubs showing your salary. When you pay yourself as an employee of the business you own, it indicates that your business is structured in a way that provides you with a predictable monthly income.

Income Audit

Another option is to submit to an income audit. This is the path that I took four and a half years ago when I bought a home. We were offered the chance to use a “special” loan, but the interest rate was 12%! We wanted the best possible rate, which at the time was 6.02% in our area. Our lender told us that an income audit, in conjunction with our tax returns and bank statements, could put the underwriters’ minds at ease.

We hired an accountant to audit our income. He looked through bank statements, 1099s, and even contacted a few of my clients to verify information about how long they had used my services, and what they usually paid me. The audit took a little more than two weeks, and we provided additional information to the accountant as needed. However, in the end, the mortgage lender approved our application, and we received the best possible interest rate (it helped that we have good credit).

Can You Afford the Payments?

As you buy a home as someone self-employed, you should be just as concerned as your mortgage lender about your ability to make regular mortgage payments. When relying on irregular income, it’s  important to make sure that you are able to comfortably meet your obligation.

If your business has a bad month, or if some unexpected business expense crops up, you will be in trouble if you can’t afford your payment for that month. Instead of stretching to “afford” a house payment, it’s best to make sure that you are well within your comfort zone. My husband and I were approved for a mortgage for twice the amount we ended up paying for our house. We wanted to make sure that, if something happened to my freelance income, we would still be able to afford payments.

Before you apply for a mortgage as a self-employed person, make sure that you carefully consider your options. Look at your budget, and think about the worst case scenario. What if you lost a quarter of your business? Half your business? Do you have an emergency fund that can help you make payments? Right now, our housing costs account for about 1/5 of our monthly income. As a result, we are fairly confident in our ability to handle payments, even in the case of a financial setback.

It’s possible to get a mortgage when you are self-employed, but you will have to jump through hoops. Make sure that you really can afford the payment, and then be prepared to prove your income — on top of showing that you have a good credit score.

9 Tips for Getting a Mortgage While Self-Employed

To sum it up, here are tips to help you get mortgage more easily while you’re self-employed.

  1. Pay yourself a regular salary from your business
  2. Keep good financial records
  3. Maintain an excellent credit history
  4. Keep your debt level as low as possible
  5. Make large down payment
  6. Maintain a good cash reserve
  7. Find a good lender that has experience working with self-employed borrowers
  8. Consider buying a less expensive house
  9. Give yourself plenty of time to get through the process

For a more in depth discussion for some of these tips, check out: Getting a Mortgage with Self-Employment Income at Cash Money Life.

About the Author

By , on Mar 29, 2012
Miranda Marquit
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.

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Leave Your Comment (11 Comments)

  1. Nimish says:

    I agree.

    It takes some discipline to draw a regular income, especially if you are self-employed. Most entrepreneurs are either tempted to reinvest … or just don’t have enough to pay themselves.

  2. James says:

    Thanks for the tips. I am self employed and my wife insists we should shift out our home. I have doubt that I can meet most mortgage payment schemes available, but I seem to be having a very difficult time proving this to other people.

    I love the idea of paying yourself a regular, audited salary. If there is a record of you earning a fixed amount of income over a period of time, issuing firms will not be as reluctant to give you good rates.

    The next best option is to just give a large enough down payment. I can afford it, but the problem is that I would lose out on a lot of tax benefits if I made such a large expenditure at one time.

  3. A large down payments is perfect if you are able to pay, and of course will make the monthly payment more affordable, which means your house I’ll get pay sooner.

  4. Andrea says:

    It’s great to see someone cover the self-employed with mortgage issue in detail. There are a lot of variables and banks certainly aren’t there to help you. I found that it helped to have a mortgage broker. Mine actually showed me how I could move debt over to my business, rather than my home, too, although I suppose that’s more important in Canada, since you can write off mortgage in the US (but not Canada).

    A large downpayment will definitely help with the process.

  5. This is great information! I especially agree with making sure your payment is financially realistic. I think that’s good advice for not only the self employed but others as well!

    Thanks for sharing 🙂

  6. Charlotte says:

    Good advice, great tips! I agree with the large down payment. It’s hard to wait until you have one, but it is best.

  7. I agree with Pinyo. I have now been self employed for about 4 years now and we will be looking to buy another home next year. I just hope it is not a problem.

  8. Pinyo says:

    @Thad – If you have been self-employed for a few years and you can show consistent income over the years, it should be easier. It’s still not as easy as working for someone, or incorporate your business and pay yourself a steady salary.

  9. Thad P says:

    Excellent article. I saw another blogger writing about the difficulties she had encountered in securing a mortgage due to both she and her husband being self employed.

    What about the length of time in self-employment? It would stand to reason the issue of how long someone has been self-employed would impact securing a mortgage.

  10. Jenna says:

    What about have a long term business lease near where you are buying a house?

  11. Great article! Now, I wonder how it would be to refinance your mortgage on irregular income?

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