How Much Mortgage Can You Afford If You’re Self-Employed in 2023?

Estimating how much of a mortgage you might qualify for is a relatively easy process with online mortgage affordability calculators. However, these calculators assume one major thing: that you are an employee of a company that provides you a consistent, standard paycheck and a W2 tax form at the end of the year.

If you’re self-employed, the process of qualifying for a mortgage is a bit more complicated. Lenders will need to see more documentation to verify your income and assess your ability to repay the loan.

Statistics on Self-Employed Mortgages in 2023

According to a recent study by the National Association of Realtors, self-employed borrowers accounted for 12% of all mortgage applications in 2022. This is up from 10% in 2021. The study also found that self-employed borrowers were more likely to be approved for mortgages than W-2 employees. The approval rate for self-employed borrowers was 74%, compared to 69% for W-2 employees.

How Much Mortgage Can I Get Approved For?

The amount of mortgage you can get approved for will depend on a number of factors, including your income, debt-to-income ratio, and credit score. However, in general, self-employed borrowers can qualify for mortgages up to 80% of the purchase price of a home.

What Do You Need If You’re Self-Employed?

To qualify for a mortgage as a self-employed person, you will need to provide the following documentation:

• Two years of personal tax returns
• Proof of income, such as bank statements or invoices
• A letter from your accountant or bookkeeper verifying your income
• A copy of your business plan, if you have one
• A credit report

Stable Income Over Two Years

First, most mortgage companies will want to see two full years of stable, consistent, and hopefully growing self-employment income.

This isn’t necessarily true across the board for every mortgage company, but the more self-employment income you can show over a longer period of time, the more stable you are as a borrower.

Aggregate Taxable Income

One other thing to be considerate of in regards to your self-employment income is that lenders are going to look at your taxable income.

This is true for all mortgage applicants, but it is more pertinent to those who are self-employed, especially since many people who are self-employed have a tendency to write off losses or expenses against their self-employment income to reduce their tax liability.

While that may be a good thing for your year-end tax picture, it could adversely affect the amount of mortgage for which you qualify.

Think of it this way. If your gross self-employment income for the year is $100,000, but you have $40,000 in expenses that you write off on your taxes, a mortgage company will look at your taxable income —- or what you have available to pay your mortgage with — like $60,000.

Common Requirements for All Borrowers

Other tips to getting a mortgage approval as a self-employed individual are similar to that of W2 employees:

• Pay down as much debt as possible
• Maintain as high of a credit score as possible
• Put as large a down payment as possible

The idea is to come to the application table with your financial situation poised to increase your ability to qualify for a mortgage.

How to Calculate Self Employed Income for Mortgage

Now comes the trickier part.

Once you have all your documents in order and your mortgage company guides you through the process of getting approved for a loan, how do you estimate how much you’ll be approved for?

You may look at your current month’s income and your income projections for the year and think that’s the number the mortgage company will use. But that isn’t always the case. Just like mortgage companies don’t take into consideration any non-guaranteed bonuses or possible increases (or decreases) in the future salary for W2 employees, they won’t do that if you’re self-employed either.

Instead, what they’ll do is analyze your income over the last one or two years to get an idea of what your predictable income will be.

A general way to estimate your income, as it pertains to how a mortgage company will assess it, is to take your total earnings for the last two years and then divide it by 24.

This will give you your average monthly income. Then, multiply that number by 12, and you’ll have the number your mortgage company will most likely use in its assessment.

For example:

• Let’s say your total income for the last 24 months is $144,000
• Dividing that by 24 would give you an average monthly income of $6,000
• Multiplying that by 12 gives you an annual income of $72,000

That is the number you want to use when you’re plugging your information into a mortgage calculator.

Sure, you may have had a much stronger year than you did 20 months ago. Your income over the last 12 months may even be substantially higher than $72,000, with the prospects for even higher income almost a surefire thing.

But to be safe, use the income calculation proposed above, which is $72,000, in this example. That is a number your mortgage company will most likely use as a fair determinant of what you are likely to gain on average in the future.

Keep in mind that the mortgage company is determining your ability to re-pay your mortgage, and fluctuations in self-employment income, both positively and negatively, are more likely when you’re self-employed than when you’re a W2 employee.

As a result, lenders will proceed with more caution with self-employment income.

How to Deal with Income Instability or Seasonal Income

If you have seasonal income, you may need to provide documentation of your income from the past few years to show lenders that your income is stable overall. You may also want to consider putting down a larger down payment to improve your chances of getting approved.

It is important to note that getting a mortgage with self-employment income can be more challenging than getting a mortgage with traditional W-2 income. However, it is not impossible. By following the tips above, you can increase your chances of getting approved for a mortgage and buying the home of your dreams.

Now, Start Preparing to Apply for a Mortgage

Now that you know what kind of mortgage you may actually be able to afford, start preparing to apply for one! If you are self-employed, there are a few extra steps involved.

First, make sure you’re saving enough money to cover your closing costs and other upfront expenses. You may also need to provide more documentation as proof of income.

For example: if your business is new or in its early stages (and therefore not generating any revenue), then lenders will expect an explanation of how it plans on paying back the loan.

That means sending over a business plan showing how much money can be generated from clients within one year—which could explain why some banks require more information than others when assessing creditworthiness.

If this sounds like too much work at once and instead would prefer to focus exclusively on finding affordable homes—no problem! 

This is where a knowledgeable mortgage professional is worth their weight in commission. 

Bottom Line on Self Employed Mortgages

Getting a mortgage as a self-employed person can be a challenge, but it’s not impossible. By following the tips above, you can increase your chances of getting approved for a mortgage and buying the home of your dreams.

Here are some additional tips for self-employed borrowers:

• Work with a mortgage lender who specializes in self-employed borrowers.
• Be prepared to provide more documentation than a W-2 employee.
• Be patient. The mortgage process may take longer for self-employed borrowers.

With careful planning and preparation, self-employed borrowers can qualify for mortgages and buy homes.

Contact Embrace Home Loans Today

If you’re self-employed and thinking about buying a home, we encourage you to contact Embrace Home Loans® today. We have many programs available for self-employed home buyers, and we’re with you at every step from offer to closing.

Visit our website or give us a call to learn more about how we can help you achieve your homeownership dreams.