Anyone who’s self-employed and looking to become a homeowner faces an uphill battle. Just over a decade ago, it was much easier thanks to stated income loans. These allowed anyone with a social security number and average credit score to secure a loan. There was no need to provide proof of your income or assets and was the route of choice for all self-employed buyers. However, that all changed after the 2008 crash which was caused in large part by all these unsafe loans. While most of these loans are no longer available, there are still options for self-employed buyers. Below we outline what these options are and how a self-employed buyer can give themselves the best chance of being approved. 

How the mortgage meltdown impacted self-employed individuals

In response to the sub-prime mortgage crisis, the Dodd-Frank Act was passed in 2010. This was a huge blow to self-employed individuals as it meant they now had to provide proof of their income and assets. The problem this creates for self-employed individuals is that their net income on their tax returns is too low to qualify for a mortgage. This doesn’t create as much of a problem for regular wage earners who can qualify using their gross income. Self-employed borrowers are only qualified based on their net income. Being self-employed, these people will be taking as many legal tax deductions as they can. This leads to an unfair situation where self-employed borrows cannot meet the minimum net income levels required due to deductions. All that said, self-employed buyers still have a few options.

Bank statement loans

The gig economy has really taken off in the last few years with an estimated 25% of the workforce predicted to be a part of it by 2020. This can only be expected to rise further in the years ahead which will mean big problems for the real estate market if it doesn’t adapt. Some lenders already are and have developed a program called bank statement loans. Rather than asking for your tax returns, lenders simply require you to provide anywhere from 12-24 months of bank statements. They will then determine your average monthly income as a percentage. All assets are still required to be fully documented. 

To qualify, you must meet the following minimum requirements:

  • Be self-employed for a minimum of two years
  • A credit score that’s in the mid 500’s (though this does depend on the lender)
  • 12-24 months of bank statements
  • A down payment of between 10-20% (again, depends on the lender)

Bank statement loans are the best chance self-employed people have for securing a mortgage. The rates can be quite reasonable considering that you’re only providing your bank statements and there are no pre-payment penalties. The debt-to-equity ratio (DTI) is also higher than conventional loans, sometimes as high as 50%. However, they do come with a few downsides. For starters, interest rates will be a little higher than conventional loans and you will need to show a steady supply of bank deposits. Worst of all is that the program can be difficult to find as not many lenders offer them.

Other mortgage options for self-employed buyers

There are more than a few self-employed people who can meet the requirements for a loan. Anyone who can qualify for a loan based on the net income of their tax returns should look at these programs:

  • FHA Loan – If you can successfully document all your income but have trouble with raising the down payment, an FHA loan may be the answer. With an FHA loan, you can get away with putting down as little as 3.5%. However, this will mean taking out premium mortgage insurance that will last for the entire life of the loan.
  • USDA Loan – If you live in a rural area then this can be a great choice. No down payment is required, nor is there a need for mortgage insurance. Check the USDA website to see if you qualify.
  • VA Loan – Another option that doesn’t come with the need for a down payment or mortgage insurance is the VA loan. However, this is only available to veterans or active members of the military, or their spouse. Contrary to what you might think, you don’t even have to have gone through an active deployment to qualify. Check the Veterans United website to see if you qualify.