While it’s not impossible for a self-employed borrower to acquire a traditional mortgage loan, it’s often not easy.
Qualified mortgages (QMs) such as conventional loans and FHA loans require a steady employment record and income documentation in the form of tax returns and pay stubs.
Self-employed borrowers often can’t provide sufficient documentation using these methods. Fortunately, these hard-working borrowers have another option: non-QM loans.
Learn who qualifies for this self-employed mortgage option, and how you can take advantage of it.
Who qualifies as self-employed?
Self-employed borrowers earn their living independently, and are not W-2 employees. At least 25% of their income is from self-employment, or they own 25% or more of a business.
Self-employed individuals include:
- Business owners
- Freelancers
- Contractors
- Seasonal workers
Many self-employed individuals qualify for traditional mortgages with no issues, so a QM is not completely off the table.
The non-QM option exists for those who have trouble documenting their income and need more flexible requirements.
Self-employed individuals often have income that varies month to month, and their tax returns contain a lot of business expenses that skew income levels.
Lenders who offer non-QM loans want to see that you have the income to repay your mortgage loan, just as they do with QM loans. The difference lies in the documentation and terms they are willing to accept.
How a non-QM loan helps self-employed borrowers
A non-QM loan doesn’t follow the rules set by any government entity, so requirements such as income, debt-to-income (DTI) ratio, and credit score can be more flexible.
QM loans are backed by entities such as Fannie Mae, Freddie Mac, the FHA, and the VA. Borrowers must meet certain income and down payment requirements established by these entities.
A conventional loan, for example, requires:
- Documentation of consistent income
- Employment verification and history
- High credit score
Self-employed individuals often don’t have the income consistency or employment history to meet these requirements.
With non-QM loans, lenders will use documentation such as bank statements, 1099 forms, and asset statements instead of recent pay stubs or W-2 returns to get a reliable, accurate picture of your financial situation.
Requirements vary by lender, but generally, if you can prove to them through adequate alternative documentation that you make enough to qualify, they will work with you.
Who else can benefit from non-QM loans?
Non-QM loans aren’t just for the self-employed.
There are other types of borrowers who are unable to qualify for traditional mortgages based on their unique situations.
These borrowers include:
- Real estate investors
- Retirees
- Those with high DTI ratios or low credit scores
- Those seeking interest-only payments
- Those who recently experienced bankruptcy or foreclosure
Non-QM loans can be used to purchase primary or secondary properties, and investment properties.
They are a great option for investors who don’t have the traditional documentation needed for QM loans.
What are the requirements for non-QM loans?
Lenders often want to look at the past two years to determine your income, with a combination of the following:
- One or two years of bank statements or 1099s, or
- Three months of asset statements
- Employment verification from current contract employer
Verification from your current contract employer also must confirm to the lender that this contract status will continue.
If you have income that varies greatly from year to year, you may need additional proof that these ups and downs represent a typical pattern for your business.
What if I’m newly self-employed?
If you’re newly self-employed, it can take time to build up the necessary documentation to prove to a lender you make enough — and will continue to make enough.
These borrowers may be able to use a combination of previous W-2s, 1099s, and bank statements to prove your income.
Talk to your lender to determine your options. Even if you don’t qualify for a mortgage yet, there are plenty of next steps for self-employed borrowers to prepare.
How to prepare to get a self-employed mortgage loan
Before you apply for a mortgage loan, take a look at the following steps to help you get in the best financial spot.
Calculate your DTI ratio
While lenders accept a higher DTI ratio with non-QM loans, it’s still in your best interest to see where you’re at and evaluate whether you can pay down any debts.
Your DTI ratio is all your monthly debt payments divided by your gross monthly income.
Build up your savings
Separate your personal and business assets, and build up your savings to show your lender you’ve got the ability to put down more money.
Organize your documents
Work closely with your lender to find out what exact requirements they need to see, and begin gathering this information ahead of time.
It can take time to collect this information, since many self-employed individuals have a lot more paperwork.
Find your trusted lender
The specialists at River City Mortgage are ready to help you find the perfect loan option for you. We offer non-QM loans for self-employed borrowers, with accepted credit scores as low as 680.
Get started with our team today.
We know you will appreciate our authentic, accessible approach to lending.
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