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Generally, lenders require more documentation for self employed individuals. However, obtaining a loan is possible by following some tips.
Lenders will want to see at least two years of steady income from a self-employment source. In some cases, a cosigner may be required to demonstrate sufficient income. Credit cards are another option.
Personal Loans
Personal loans are available for self employed people, but they tend to have different conditions than those offered to salaried employees. Lenders are looking for assurances that a borrower will be able to repay their debt, and one of the ways they can do this is by demonstrating that their income has been consistent over time. A borrower whose earnings fluctuate from year to year can be considered a financial risk, as they may not be able to make loan payments in down periods when their business might experience lower revenue.
For ezi loans this reason, borrowers who are self employed must present a more extensive list of documentation than those who have traditional jobs. This can include bank statements and several years worth of tax returns in order to verify their income. In addition, they might be asked to demonstrate that they have a strong credit history and ample savings in order to prove that they can cover monthly loan payments.
For this reason, many lenders offer a prequalification process for prospective borrowers, which allows them to see whether or not they will be approved before submitting an application. Once they have done this, they can then compare offers from multiple lenders and choose the best one for their situation. This can save both time and money as applicants can find out what they are likely to qualify for and the terms that will be offered to them.
Credit Cards
If you’re self employed as a freelancer, independent contractor or small business owner, a credit card can help you keep your personal and professional expenses separate. The best credit cards for the self employed offer low to no annual fees and competitive rewards, plus a way to build your business’s credit.
Shvarts says a business card can be beneficial for freelancers and contractors, who can often wait a while to get paid from clients. According to a 2018 survey from Bonsai, a contracting and invoicing platform for freelancers, 29 percent of freelance invoices are paid late.
A good option for people with average to excellent personal credit scores is the Chase Ink Business Cash credit card. It has no annual fee and earns 5% back on office supply store purchases and on wireless phone service purchased directly from US service providers, and 1% on all other spending. You’ll also get 80,000 Chase Ultimate Rewards points after spending $5,000 in the first three months. This card does report account activity to your personal credit score, though.
Business Loans
There are a variety of loans available for business owners, including small business loans, lines of credit and even mortgages. Generally, these types of loans require higher credit scores and more documentation than personal loans. Lenders will want to see bank statements, profit and loss reports, tax returns, financial projections and other forms of documentation. The requirements vary by lender and loan type.
For example, a company called Giggle offers a business line of credit for self employed professionals. To qualify, you must have a good to excellent credit score and provide business bank statements. You must also demonstrate revenue growth and stability over time. If you have a low credit score, a co-signer may be needed.
Many lenders specialize in small business lending. These include traditional banks, credit unions and a variety of online lenders. Many of these lenders offer business loans with flexible terms and relatively easy qualification requirements. For instance, some offer funding in 24 hours.
Another option is the Paycheck Protection Program, which helps sole proprietors, independent contractors and freelancers qualify for a small business loan by using their 1099s as documentation of income. The program now uses gross instead of net income when calculating PPP loan amounts for Schedule C filers, making it easier for self-employed workers to qualify.
Mortgages
Getting a mortgage while self employed isn’t as difficult as some people believe. But a borrower may have to provide more documentation and might pay higher interest rates than someone with a regular job and salaried income, experts say.
During the mortgage process, lenders look at your total debt and monthly expenses to calculate what’s known as your debt-to-income ratio. This includes mortgage payments, credit card debt and student loans. Lenders may require verification of your income from a certified public accountant, professional organization membership or bank statements. They also might ask for tax transcripts from your previous years’ returns to verify your annual income.
Mortgage borrowers who are self employed often need to supply three or more years of tax forms, DeSimone says. But some lenders are willing to accept only two years, if the borrower has a strong track record of paying taxes and showing consistent business revenue. Some lenders are even willing to use a “depreciation add-back” that allows certain noncash business deductions — like depreciation — to be subtracted from net income during the underwriting process.
Some mortgage lenders offer a type of mortgage called a “bank statement loan,” which doesn’t require a borrower to submit tax returns or other types of verifiable proof of income, but these loans generally have a higher interest rate than those offered by traditional lenders. Borrowers can also opt for an FHA or VA mortgage, which are backed by the federal government and mitigate some of the lender’s risk.