Applying for a mortgage can seem daunting – especially if you're self-employed or are working in the gig-economy. However, it may not be as complicated as you think.
Generally, lenders will evaluate the four Cs when determining a borrower's eligibility for a mortgage. If your self-employed, you'll still be evaluated on the four Cs, but may be asked to provide some different or additional documentation to determine how much you may be qualified to borrow.
If you're self-employed, you may be required to submit the following documents when applying for a mortgage:
- Two years of personal tax returns
- Two years of business tax returns including schedules K-1, 1120, 1120S
- Business license
- Year-to-date profit and loss statement
- Balance sheet
- Signed CPA statement
- Capacity: Lenders look at your income, employment history, savings, and monthly debt payments, such as credit card charges and other financial obligations, to make sure that you have the capacity to take on a mortgage comfortably.
- Capital: Lenders consider your readily available money and savings plus investments, and other assets that you could sell fairly quickly for cash. Having these reserves demonstrates that you have additional funds, in addition to your income, that are readily available to pay the mortgage.
- Collateral: Lenders take into account the value of the property that you're pledging as security against the loan. Depending on how your personal business is organized, additional documentation may be required.
- Credit: Lenders check your credit score and history to assess your record of paying bills and other debts on time.
The biggest difference in the four Cs for self-employed borrowers is proof if income – which falls under capacity. For salaried borrowers, lenders will typically require at least one month of pay stubs and one or two years of W-2s to determine the applicant's income. However, if you're self-employed, you likely don't have W-2s. Instead, you will need to submit different documentation such as one-to-two years of personal and business tax returns to verify your income.
Additionally, if you're self-employed or you own your own business, you may have to provide additional documentation to show your assets, for example — a business license or a statement from your accountant.
Throughout the homebuying journey it's important that you work with a trusted team of advisors to guide you through the process. If you're a self-employed borrower and your lender is an approved Freddie Mac Seller/Servicer that submits loans through Loan Product Advisor®, they can register for our Loan Product Advisor asset and income modeler (AIM) for self-employed capability. AIM for self-employed helps simplify your income calculation using tax return data – and helps get you and your lender to closing faster.
Learn more about the homebuying process by visiting MyHome® by Freddie Mac.
