Question: The company where I worked for eight years closed several months ago and as a result I lost my job. As an alternative to seeking another position I decided to go and work for myself. Good news – I’m making money.
I’m now interested in buying a home but not clear how lenders will count my income.
Answer: Job switches are not uncommon. According to the Bureau of Labor Statistics, the typical worker has held the same job for just 4.2 years. Given this reality, it’s not surprising that lenders have guidelines which show how to handle such cases.
Depending on what type of mortgage you are trying to get, there are going to be different guidelines to follow.
The Department of Housing and Urban Development (HUD) says that lenders may consider self-employment income if the home buyer has been self-employed for at least two years.
If the buyer has been self-employed between one and two years, then the lender may only count the income if the the home buyers “was previously employed in the same line of work” where the buyer is now self-employed “for at least two years.”
Those looking to get an FHA loan will have to follow these guidelines when applying.
According to the VA, self-employment for “less than two years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.”
It adds that a prospective home buyer with less than one year of self-employment “can rarely qualify.”
There are other requirements that come with VA loans. Applicants must be active or retired military members, and in some instances their spouses can be eligible as well.
One of the two big buyers of conforming mortgages, Fannie Mae says “self-employment income can vary from year-to-year and because of the increased chance of uneven cash flows, self-employment adds a layer of risk that is not present with salaried borrowers.”
Self-employed buyers also have a higher chance of become delinquent on payments, meaning higher risk for lenders.
Because of this, Fannie Mae requires two years of work history to show their earnings – and prove that they will continue to make around that month in the future.
Some homeowners can use just 12-24 months of self-employment if they are still working in the same field as they were before they became self-employed.
Freddie Mac, the other big buyer of local mortgages, requires that those with less than two years of self-employment history must prove they have at least two years of experience in the field.
The home buyer must also show tax returns which “reflect at least one year of self-employment income.”
So through Freddie Mac, two years of self-employment history is not required in all cases.
While most mortgages are made within the guidelines above, there are loans which lenders originate and keep, so-called “portfolio” loans.
Since portfolio loans can have guidelines which can be different from the usual standards, it’s possible that some lenders might be willing to finance a self-employed home buyer with less than a year or two of experience.
The Bottom Line
Qualified home buyers who have been self-employed for at least two years should fly through the system. Those with one to two years of self-employment will need to fully document their income and experience plus they can expect more lender scrutiny.
Home buyers with less than one year of self-employment will likely need to wait before applying for a mortgage, unless they can find a friendly portfolio lender.