Real estate agents: How to help self-employed buyers navigate the mortgage process

From setting their own hours to choosing what projects to take on, self-employed individuals enjoy many perks—but a simple mortgage process is not one of them. Whether they are independent contractors juggling multiple gigs or own a small business, your self-employed buyers need to jump through more hoops than W2 employees when it comes to securing a mortgage.

Self-employment has grown in prevalence in recent years, particularly with the rise of the gig economy. Roughly 9.3 million Americans were self-employed by the end of 2020, down slightly from their ranks before COVID-19 struck, according to U.S. Bureau of Labor Statistics data.

Freelancers have been more vulnerable than full-time employees to pandemic-related closures or lost business. Still, self-employed workers likely comprise a growing proportion of your potential buyers, so it may useful to know what they may expect in the mortgage process.  

How self-employed buyers can prepare for the mortgage process

The number one issue for self-employed buyers is that it's more complicated to prove a steady income to lenders. Without a simple W2 to present, the mortgage application process generally takes longer and requires more footwork.

Following are key ways you can support self-employed clients as they hunt not only for their next home, but for the mortgage they'll need to walk away with the keys.

Start early

First and foremost, potential borrowers should know that the process may take longer than they expect. Even more so than with your traditionally employed clients, encourage self-employed clients to get pre-qualified and establish a relationship with a trusted lender early in the process.

Crunch the numbers

It can be more complicated for freelancers and independent contractors to land on the optimal amount of mortgage debt to shoulder, because their monthly incomes are more likely to fluctuate than W2 employee clients. Online calculators are a good place to start, but also encourage clients to analyze their finances more carefully to avert house-rich/cash poor scenarios.

Prepare for rigorous documentation requirements

The mortgage paper trail will be longer for your self-employed clients, beginning with credit scores and two years of business and personal tax returns—complete with 1040s and schedules—and continuing on to include detailed profit-loss statements for the current year to date. Lenders typically also require balance sheets, loans and debts, savings and investments, other revenue streams, and work history.

Understand how lenders evaluate self-employment income

Though writing off expenses can help your client at tax time, this practice won't aid their mortgage applications. Their taxable income, rather than total income, will be considered the qualifying income. So these clients should evaluate debt-to-income ratio not on total income, but on the net they've reported after write-offs.

There’s no one rule about down payments.

You probably already know that the days of 20%-or-bust down payments are over. But for self-employed clients, settling on the down payment plan may be more complex. If your client can pull more from savings or other investments, it may be in their interest to ramp up the down payment.

Self-employment can require a bit more paperwork when applying for a mortgage, but the due diligence will feel well worth it when your client receives the keys to their dream home.

Check out these other mortgage articles for real estate agents

• Real estate agents: What today’s low interest rates mean for your buyers
• Real estate agents: A game-changing year for home values—and the appraisal process
• Real estate agents: How to help your clients chart a smooth course to closing