Mortgage Loan Options for Self-Employed Individuals in California

Self-employment offers a lot of freedom and flexibility. But it can also pose some unique challenges when it comes to qualifying for a mortgage loan in California.

Without a traditional W-2 type of income, self-employed borrowers can have a harder time proving their ability to repay the loan.

In this article, we will explore some of the financing options and strategies available for self-employed individuals in California, including bank statement and stated income loans.

1. Self-employed individuals in California can qualify for mortgage loans, but they typically need to use alternative income-verification methods.
2. Bank statement loans allow self-employed borrowers to qualify using 12 to 24 months of bank statements instead of the traditional W-2 document.
3. Stated income loans let borrowers declare their income without extensive documentation, though they often come with higher interest rates.
4. Conventional, FHA, and VA loans are still options for self-employed buyers, but they require tax returns, profit-and-loss statements, and other financial documents.
5. Working with a mortgage broker can help self-employed borrowers find the best loan option for their situation.

Self-Employed Mortgage Loan Options in California

For a “traditional” mortgage loan, borrowers usually have to provide copies of their W-2 tax forms for the purposes of proving their income. Mortgage lenders review these (and other) documents to make sure a person has the financial ability to repay the loan, which is in everyone’s best interest.

But this isn’t always possible for self-employed borrowers in California. Contractors, freelancers, gig economy workers, and other self-employed people usually receive 1099 tax forms, as opposed to the traditional W-2.

Despite these differences, self-employed home buyers in California can still qualify for mortgage loan financing.

Having the ability to repay the debt is what really matters. If you have a decent credit score and sufficient income to manage your monthly payments, your self-employment status might not be an obstacle at all.

You just have to choose a program that’s best suited for a self-employed borrower, so let’s talk about some of those mortgage options.

1. Bank Statement Loans

Many self-employed borrowers in California end up using a bank statement loan to finance their home purchases.

With this mortgage option, you provide bank statements as proof of your regular income. But you don’t have to provide pay stubs or W-2s, like a traditionally employed borrower would have to do.

In California, the bank statement loan can also be a good option for self-employed individuals who have a lot of business expenses that reduce their taxable income.

To qualify for this type of mortgage loan, borrowers typically need to provide 12 to 24 months of bank statements. You’ll also need to have a decent credit score and a manageable level of debt, relative to your income.

• Bank statement loans allow self-employed borrowers to qualify for a mortgage using bank deposits instead of traditional income documents like tax returns or W-2s.
• Lenders typically review 12 to 24 months of personal or business bank statements to verify income and determine eligibility.
• These loans are popular among self-employed individuals, business owners, freelancers, and real estate investors who have strong cash flow but low reported taxable income.
• Bank statement loans offer more flexible underwriting but often come with higher interest rates, larger down payment requirements, and stricter credit score standards.
• They can be a good option for borrowers who have difficulty qualifying for conventional loans due to how their income is structured.

Learn more about bank statement loans

2. Stated Income Loans

Stated income loans are another option for self-employed home buyers in California who cannot document their income through traditional means. As the name implies, these loans allow borrowers to state their income without having to provide extensive documentation to support it.

Due to the lack of documentation involved, these loans can be riskier for lenders and mortgage servicers. So you might end up with a higher interest rate, compared to a regular conventional mortgage product. And once again, you’ll need to have a good credit history and a manageable level of debt. See the article below for more details.

• Stated income loans allow borrowers to qualify for a mortgage by stating their income without providing tax returns, W-2s, or pay stubs.
• These loans are commonly used by self-employed individuals, freelancers, and business owners who have strong finances but unpredictable or difficult-to-document income.
• Stated income loans typically come with higher interest rates, larger down payment requirements, and stricter credit score standards than conventional mortgages.
• They can be a good option for borrowers who have significant cash reserves or alternative income sources but struggle to meet traditional loan requirements.
• Since stated income loans carry more risk for lenders, borrowers should expect thorough asset verification and be prepared for stricter loan terms.

Learn more about stated income loans

3. Conventional Mortgage Financing

What about regular mortgage loans? Can self-employed home buyers in California qualify for a conventional or “regular” mortgage loan, when buying a house?

Depending on your situation, you might not need to use one of the specialty loan options mentioned above. You might be able to qualify for a traditional or conventional loan, as long as your income supports it.

In fact, the mortgage qualification process for self-employed and traditionally employed borrowers is very similar. But there are a few important differences when it comes to documentation.

Self-employed home buyers in California who want to apply for a conventional loan usually have to provide profit-and-loss statements, along with personal tax returns for the past two years. Additional documentation might be required as well.

4. FHA and VA Loans

Government-backed mortgage programs, like FHA and VA, are another option for self-employed borrowers. They offer other benefits as well, including the ability to make a low down payment (or no down payment, in the case of VA loans).

These programs have specific requirements regarding income and employment. For example, the official handbook for FHA loans states:

The Mortgagee may consider Self-Employment Income if the Borrower has been self-employed for at least two years. If the Borrower has been self-employed between one and two years, the Mortgagee may only consider the income as Effective Income if the Borrower was previously employed in the same line of work in which the Borrower is self-employed or in a related occupation for at least two years.

VA loans (for military members and veterans) have their own unique requirements as well, when it comes to self-employed borrowers. But they are beyond the scope of this article.

The official lender’s handbook for VA loans states the following:

If the borrower is self-employed, the loan file must include 2 years of tax returns and a profit and loss statement for year-to-date since the end of the last fiscal year, and a current balance sheet showing all assets and liabilities.

The key takeaway here is that self-employed home buyers in California can often qualify for both the FHA and VA loan programs, as long as they meet the two-year rule and other requirements.

A Good Reason to Work with a Mortgage Broker

When exploring your financing options, you can benefit by working with a mortgage broker like Bridgepoint Funding.

Because of our business model, we are able to offer a larger variety of loan options. That’s because we work with a number of different lenders, instead of just one. This increases the chance of finding the right type of loan for each individual client.

We work with self-employed home buyers in California on a regular basis. We are familiar with all of the different loan options and what it takes to qualify for each of them.

So, if you have questions about getting a mortgage while self-employed, please contact our staff. We can help you choose the right financing strategy for your particular situation.