Hello, would-be homeowners! Do you work for yourself and wonder if you can achieve your goal of owning a house? Fear not—the answer is absolutely yes! You can still qualify for a mortgage and own a piece of the American dream with as little as one year of income under your belt.
But before you start browsing open houses, let’s dive into the specifics and understand the nuances of getting a mortgage with limited income history.
The Two-Year Hurdle: A Common Myth
Many believe that you need two years of self-employment income to qualify for a mortgage. While it’s true that most lenders prefer a two-year track record it’s not an absolute requirement. Several loan programs and strategies can help you achieve your homeownership goals even with just one year of income.
Strategies for Qualifying with One Year of Income:
1. Leverage Your Previous Work Experience:
If you have a solid work history in a similar field before becoming self-employed, you can use that to your advantage. Lenders may consider your previous income and job stability when assessing your current earning potential.
2. Explore Non-QM Loans:
For borrowers who don’t suit the conventional mold, non-qualified mortgages, or “non-qualified mortgages,” provide greater flexibility. One year’s worth of income documentation may be accepted for these loans, but be prepared for possibly higher interest rates and more stringent qualifying requirements.
3. Utilize Bank Statement Loans:
Some lenders consider your bank statements as proof of income. This can be helpful if you have consistent and substantial cash flow, even if your tax returns show lower income due to deductions.
4. Consider Co-Borrowing or Co-Signing:
A co-borrower with a solid credit history and consistent income can strengthen your application. Co-signers can also provide additional security for the lender.
5. Aim for a Larger Down Payment:
Putting down a larger down payment can significantly improve your chances of approval. It demonstrates your financial commitment and reduces the lender’s risk.
Understanding the Challenges:
Tax Write-offs and Lower Reported Income:
Self-employed individuals often utilize tax write-offs, which can lower their reported income. This could have an impact on your ability to borrow money because lenders normally base loan amounts on your net income after deductions.
Documentation Requirements:
Be prepared to provide extensive documentation, including tax returns, business licenses, invoices, and bank statements, to support your income claims.
Finding the Right Lender:
Not all lenders are comfortable with borrowers with limited income history. Shop around and find a lender who specializes in working with self-employed individuals and understands your unique situation.
Additional Tips for Success:
Maintain Excellent Credit:
A strong credit score is crucial for securing a favorable interest rate and increasing your chances of approval.
Minimize Debt:
Lower your debt-to-income ratio by paying off existing debts, which will free up more room for your mortgage payment.
Get Pre-Approved:
Getting pre-approved for a mortgage gives you a clear picture of your borrowing power and helps you narrow down your house search.
Work with a Mortgage Professional:
An experienced mortgage professional can guide you through the process, explain your options, and help you find the best loan for your needs.
Remember, buying a house with one year of income requires careful planning and preparation. By understanding the challenges, exploring your options, and working with the right professionals, you can overcome the hurdles and achieve your dream of homeownership.
So, don’t let the lack of a two-year income history deter you. With the right strategies and a proactive approach, you can unlock the door to your new home!
Self-employment is only one variable for home buyers
Whether you have worked for yourself for a year, three years, or decades, your monthly income is just one component of what determines whether you qualify for a mortgage. Lenders also look at these factors:
- Credit score: Minimum scores range from 580 to 680 depending on the type of mortgage. Self-employed borrowers might have to meet higher credit score requirements than usual with certain lenders.
- Monthly debts: The amount of money you can spend on a mortgage payment is restricted by monthly debts, such as credit card minimum payments or auto loans. Lenders will size your loan accordingly.
- The value of the house: Lenders base the maximum loan amounts on the purchase price of the house. They are unable to give out more credit than the property is worth.
- Size of down payment: Conventional and FHA loans require a down payment, but USDA and VA loans do not. The purchase can be made for as little as 3% down payment (or 203 5% down for FHA loans).
You can improve your eligibility if you work for yourself by strengthening your application in these other areas of your personal finances.
It can be very beneficial to make a larger down payment than necessary, pay off personal debt, and ensure that you have excellent or at least good credit. Having additional funds in your bank account beyond what you require for your down payment and closing costs will also be beneficial.
Can you get a mortgage with just one year of tax returns?
Obtaining a mortgage is one of the difficulties of working for yourself, particularly if you haven’t been in business for more than two years. Generally speaking, lenders want to see your tax returns for the last two years to confirm that your self-employment income is steady and consistent.
Fortunately, some borrowers can use just one year of tax returns to qualify for a mortgage. But there are special rules to be aware of. Here’s what you should know.
In this article (Skip to…)
How Much Home You Can ACTUALLY Afford (By Salary)
FAQ
Can you get a mortgage with 1 year of income?
Can you get a loan with 1 year of tax return?
How many months of income do you need for a mortgage?
|
Loan Type
|
Job History Requirement
|
|
Conventional loan
|
Two years of related history. Need to be at current job for six months if applicant has employment gaps
|
|
FHA loan
|
Two years of related history. Need to be at current job for six months if applicant has employment gaps
|
Can you use 1 year of tax returns for FHA?
Can you buy a house on a single income?
However, you’ll also need sufficient income to cover the payments as well as strong credit. If you can’t qualify for a home on your own, you can consider adding a co-borrower with good credit. Thanks to low-down-payment programs, buying a house on a single income is possible even if you’re not wealthy.
How much money do you need to buy a home?
These limits vary depending on the program. Typically, your income cannot exceed 100% to 115% of the median area income. The amount of money you earn isn’t the only thing that matters when buying a home. You should be mindful of other factors lenders take into consideration when reviewing your application:
Do you need a high salary to buy a home?
Income requirements for a mortgage: Outside of those basic criteria, income requirements for a home loan are flexible. Most types of income can qualify — from standard salaries to commission, investment, self-employment, bonus, and RSU income. Thanks to today’s flexible mortgage programs, you don’t need a high salary to buy a home.
Can I buy a house if I’m not wealthy?
If you can’t qualify for a home on your own, you can consider adding a co-borrower with good credit. Thanks to low-down-payment programs, buying a house on a single income is possible even if you’re not wealthy. Here’s what you need to do.