Don’t Let These Self-Employed Mortgage Myths Hold You Back
Securing a mortgage can be overwhelming for anyone, but it can be especially challenging for those who are self-employed. Even though the self-employed demographic makes up about 10.4% of the total U.S. working population, there are still many myths about self-employed mortgages without having a 9-to-5 job. If you’re self-employed and looking for a mortgage, don’t let these myths hold you back.
In this article, we’ll debunk five common myths about self-employed mortgages, giving you the facts you need to confidently start your journey to homeownership.
7 Common Myths About Self-Employed Mortgages
Myth 1: Self-Employed Individuals Can’t Qualify for Mortgages
Contrary to popular belief, self-employed individuals can indeed qualify for mortgages. Self-employed individuals can and do qualify for mortgages, provided they meet specific lender requirements. Some private mortgage lenders even offer specific loan types that are designed to accommodate the unique income streams of entrepreneurs and freelancers. To improve your chances of qualifying, focus on organizing required financial documents and consider working with a lender experienced in handling self-employed mortgages, like Defy Mortgage.
Myth 2: You Need Years of Tax Returns to Qualify
While years of tax returns can definitely strengthen your mortgage application, they’re not necessarily required. Many lenders have alternative documentation options available for self-employed borrowers whose tax returns don’t accurately reflect their true income. These alternative documents include bank statements, profit and loss statements, or even liquid assets as proof of income, which provides more flexibility. Whether you’re using tax returns or alternative documentation, demonstrating to a lender that you have consistent income history can help you significantly improve your chances of qualifying for a mortgage.
Myth 3: Self-Employed Mortgages Have Higher Interest Rates
It’s a common misconception that self-employed individuals face higher interest rates on their mortgages. The reality is that interest rates for self-employed borrowers can be just as competitive as those for W2 employees. When determining a borrower’s interest rate, lenders don’t just use their employment status alone – several other factors come into play, such as their credit score, financial stability, and overall risk profile. To secure competitive rates, self-employed borrowers should focus on building a strong credit history, keeping their income consistent, and providing thorough documentation of their income and assets.
Myth 4: Self-Employed Borrowers Must Have a Large Down Payment
Self-employed borrowers don’t necessarily need a large down payment. There are a variety of loan options and programs available that offer down payment requirements that are lower than the standard 20%. For instance, Defy’s bank statement and P&L loans only require a minimum of 10% down for self-employed borrowers. Beyond these two options, we offer a wide range of non-QM loan options (non-qualified mortgages) with flexible qualification requirements for self-employed borrowers.
Another low down payment option could be government-backed loans. While it could be more challenging to qualify for a government-backed loan as a self-employed individual, it’s not impossible. FHA loans allow down payments as low as 3.5% for qualified borrowers, while VA loans offer zero-down payment options for eligible veterans and active-duty military members.
Myth 5: You Need Perfect Credit to Get a Self-Employed Mortgage
While a high credit score can certainly help a self-employed individual secure better interest rates and terms, it’s not a strict requirement for securing a mortgage. Many lenders offer mortgage options for borrowers with less-than-perfect credit, especially if they can show that they have a stable income and are financially responsible. At Defy, we typically require a minimum credit score of 620 or higher for our self-employed mortgage options with a minimum score of 600 for our P&L loans with a reduced LTV. If you think your credit score isn’t strong enough to qualify, talk to a lender first and try taking proactive steps to increase your credit score.
Myth 6: Self-Employed Borrowers Can’t Use Certain Types of Income
This myth overlooks the flexibility that self-employed mortgage lenders offer when evaluating income sources. In reality, self-employed borrowers can generally use a variety of income types to qualify for a mortgage, including income from freelancing, contract work, rental properties, investments, and even seasonal income. Self-employed mortgage lenders are often quite familiar with the diverse income sources that self-employed individuals may have. The key is to keep all of your income sources well-documented and organized. For example, if you’re applying for a bank statement loan, having all of your income deposited to one bank account will make it easier for both you and the lender during the application process. This makes it clear that you have a consistent and reliable income stream.
Myth 7: It’s Too Complicated to Apply for a Self-Employed Mortgage
“It’s too complicated to apply for a self-employed mortgage” is far from the truth. Generally, the difficulty of getting any mortgage is often exaggerated. Considering that 38% of self-employed individuals think having specialized lenders that cater to their unique income structure would make the application process easier, lenders have started to listen. Now, there are plenty of lenders on the market that offer specialized mortgage solutions for self-employed borrowers, and Defy is one of them. Working with a lender who’s experienced in self-employed mortgages can make the process seamless and simple.
Ready to take the first step in your self-employed mortgage journey?
The myths about self-employed mortgages can create unnecessary barriers for those with nontraditional income streams. But, as we’ve explored, these myths are largely untrue. Understanding the realities behind these myths about self-employed mortgages can set you up for success when you begin your home buying journey.
At Defy, we believe that buying a house should be an exciting process, not time-consuming and stressful. With our streamlined application process and dedicated support from our mortgage experts, we can help you secure a new mortgage quickly and effortlessly. Take the first step in your self-employed mortgage journey and get a quote from us today.
