Why Being Your Own Boss Makes Buying a Home More Difficult

self-employed mortgage

These days, more and more Americans are embracing their entrepreneurial spirits and launching their own businesses.

This is especially true of Millennials. Young professionals have started almost twice as many businesses as baby boomers, according to

But while running your own business can give you more earning potential and freedom, it can make buying a house more difficult, too. Getting a self-employed mortgage can be a challenge.

The growth of self-employment

The number of people who are self-employed continues to grow in the U.S. In 2014, 14.6 million Americans were self-employed, making up about 10 percent of the nation’s workforce.

This growth can be tied to Millennial entrepreneurs, who are professionals between the ages of 20 and 25. They are launching more companies, managing bigger staffs, and raking in more money than previous generations.

And this generation of young entrepreneurs is discovering their paths much earlier than boomers.

The 2016 BNP Paribas Global Entrepreneur Report also found that while previous generations launched their first business at the average age of 35, Millennials are branching out on their own by 27.

This trend is only expected to grow. Research from the 2015 MBO Partners State of Independence study projects the number of independent workers to reach 38 million by 2020.

Impact of self-employment on home buying

That same study also found that approximately 45 percent of self-employed workers make more money working for themselves than they would at a regular 9-to-5.

However, despite higher incomes and more earning potential, individuals have a tougher time getting a self-employed mortgage. While you might think a higher income would make getting a loan easier, that’s not always the case.

Many lenders do not offer mortgages for self-employed workers. Or, they have much stricter requirements that make the process more complicated.

In 2014, real estate giant Zillow did a study that revealed that self-employed borrowers receive 40 percent fewer mortgage quotes than traditionally employed borrowers.

Why a self-employed mortgage is so hard to get

Essentially, a self-employed mortgage loan is harder to come by. And you will need to jump through more hoops to qualify.

Lenders say this is due to a variety of factors associated with being your own boss.

For instance, in 2014 self-employed borrowers were more likely to report a credit score under 680, according to Zillow. That score makes them less than ideal candidates for a mortgage.

Independent workers typically have lower scores because many entrepreneurs need to borrow funds to get their businesses off the ground.

And even though self-employed borrowers have lower scores, Zillow found that they tended to shop for houses that were 12 percent more expensive than homes targeted by traditional borrowers in 2014.

Although that makes sense since they typically make more money, it still makes lenders less likely to give them a loan.

Furthermore, while independent workers make more money, their incomes tend to ebb and flow from year to year. That variability makes lenders more nervous.

While getting a self-employed mortgage loan is challenging, it’s not impossible. You’ll just need to take more steps and start the home-buying process earlier to improve your chances of getting approved.

How to get a self-employed mortgage

Prepare your paperwork ahead of time

You’ll need to provide several months of personal and business checking account statements that show your regular income and expenses. Be prepared to also show two years of federal tax returns showing your income.

And if you have any investment accounts, show those statements as well to prove you have an adequate cash reserve.

Improve your credit score

A good credit score is essential for getting a mortgage with a good interest rate.

If necessary, improve your score early on to improve your chances of getting a loan. You can start by lowering your debt load and making all your payments on time.

Show financial stability

If you’re self-employed, you cannot get a mortgage without at least two years of tax returns.

And if you’re planning on buying a home and considering making the jump to freelancing, you may want to stay in your salaried position until after you buy a home.

Otherwise, you’ll need to wait two tax years before you can begin home shopping.

Save a sizable down payment

While home loans are available with as little as three percent down, a self-employed borrower with a small down payment will make lenders less likely to give you a mortgage.

That’s why you should try and save as much as you can. It’s a good idea to aim for 20 percent, which will also help you avoid buying private mortgage insurance (PMI).

A sizable down payment ultimately increases your chances of getting a home loan if you’re self-employed.

Pros and cons of being your own boss

While buying a home and getting a self-employed mortgage can be more challenging, being your own boss can be worthwhile because of the freedom and increased earning potential it gives you.

If home ownership is your goal, do not let the challenges of getting a self-employed mortgage deter you from being your own boss.

By understanding lenders’ concerns and the extra requirements you’ll face, you can be proactive and increase your likeliness of getting a competitive mortgage.

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Published in Budgeting, Buy or Rent a Home, Financial Goals