Getting a mortgage as a self-employed individual involves a different process compared to traditional W-2 employees. Freddie Mac, a key player in the U.S. secondary mortgage market, has established specific guidelines to help lenders assess the unique income situations of self-employed borrowers.
Why Are Special Guidelines Needed for Self-Employed Borrowers?
Self-employed income tends to be variable and affected by business expenses and tax deductions, which complicates the verification of stable income for mortgage qualification. Unlike salaried employees who provide consistent pay stubs, self-employed borrowers must demonstrate steady income over time using detailed documentation.
Key Components of Freddie Mac’s Guidelines
- Two-Year Income History: Lenders typically require at least two years of self-employment income documented via personal and business tax returns, including IRS forms like Schedule C (sole proprietors), Schedule K-1 (partnerships or S-Corps), Form 1065, and Forms 1120 or 1120-S (corporations).
- Income Averaging: Lenders average the net income from the last two years to estimate the borrower’s monthly income. This helps balance out any fluctuations between years.
- Net Income Consideration: The focus is on net profit after business expenses, which is the income used for qualification. High business deductions can reduce qualifying income.
Documentation Required
Self-employed applicants must provide comprehensive paperwork such as:
- Personal and business tax returns (commonly 2 years)
- Year-to-date Profit & Loss statements, ideally prepared by a CPA
- Recent business bank statements (3-6 months)
- Proof of business existence like licenses or registrations
Other Important Factors
- Debt-to-Income (DTI) Ratio: Typically lenders expect a DTI under 43-45%. This ratio compares monthly debts to gross qualifying income derived from tax returns.
- Credit Score: Freddie Mac requires a minimum credit score (often 620 or higher) but higher scores improve approval chances and loan terms.
- Cash Reserves: Self-employed borrowers might need to hold larger cash reserves post-closing than W-2 borrowers to cover potential income variability.
Common Challenges to Avoid
- Over-deducting business expenses can lower reported net income, reducing loan eligibility.
- Poor documentation or commingling personal and business finances complicates income verification.
- Applying for a mortgage without the recommended two-year self-employment history often requires compensating factors.
Tips for Self-Employed Mortgage Applicants
- Keep detailed, organized records and separate business and personal accounts.
- Plan financial moves years in advance if home buying is anticipated.
- Maintain good credit and save for a significant down payment.
- Work with lenders experienced in self-employed borrower underwriting.
For more detailed insights on income verification for the self-employed, see our Self-Employed Income Verification guide.
Freddie Mac’s full guidelines are available in their Selling Guide, which lenders use to assess eligibility.
Understanding and preparing for these requirements can improve the chances for self-employed individuals to secure a mortgage successfully and confidently.
References:
- Freddie Mac Single-Family Seller/Servicer Guide (2025): https://sf.freddiemac.com/docs/default-source/guide/ch05/ch5301.pdf
- Consumer Financial Protection Bureau: Mortgage Basics for Self-Employed
- FinHelp.io glossary: Self-Employed Income Verification
For further reading on mortgage types and credit considerations, visit FinHelp’s Conventional Mortgage and Credit Overlays pages.