Homebuyers

Self-Employed? No Problem. How to Get a Non-QM Loan to Buy a Home

From TikTok influencers to investors, more Americans are forgoing traditional employment and striking out on their own by starting businesses and joining the gig economy.

While these opportunities can be exciting professionally, they can make it harder for those who rely on large tax write-offs, have fluctuating incomes, and do not receive W-2 tax forms to qualify for a mortgage. They may find it difficult to meet the strict income documentation requirements for traditional loans.

Small business owners, entrepreneurs, and other self-employed individuals may want to consider non-qualified mortgage (non-QM) loans.

“Non-QM loans offer a feasible route to homeownership for those who might otherwise be excluded from the traditional mortgage market,” said Dusty Lloyd, a loan officer at New American Funding. “With thorough preparation and the right guidance, a non-QM loan can make owning a home a reality.”

The evolution of home loans for the self-employed

After the 2008 financial crash, the federal government adopted new mortgage rules. This established certain standards to safeguard both the borrowers and the lenders.

Loans that fit into these standards are referred to as Qualified Mortgages, which include the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and Conventional loans. They typically require strict income documentation, such as W-2 forms and tax returns.

But not every homebuyer has a credit and income profile that fits into these standards. That’s where alternative lending options come into play.

Non-Qualified Mortgage (Non-QM) loans offer a more flexible solution for mortgage approval. They allow for other documentation such as bank statements, profit and loss statements, and asset-based income.

For example, a self-employed person might earn $200,000 as an Amazon seller but only report $50,000 in income. These loans let lenders look at deposits and judge income based on business cash flow instead of IRS accounting. This can show a different financial picture.

Loans for these types of borrowers are on the rise. According to a new report from the Urban Institute, non-agency loans (which refer to loans that do not meet Conventional or government standards) represented only 1.26% of the market in 2012. That figure remained between 2.41% and 7.42% for much of the decade since then.

But that figure rose to 9.5% in April, which is near the highest it’s been since 2008. That means that nearly 10% of the loans in April went to borrowers whose credit profile did not fit into Conventional or government lending parameters.

This may come as self-employment is on the rise. More than 10 million Americans worked for themselves in May 2024, up by more than 600,000 over the same period last year, according to the data from the U.S. Bureau of Labor Statistics.

This growing group includes entrepreneurs, freelancers, and digital content creators.

"Though the Non-QM loan is a small piece of today's mortgage market, it plays a key role in meeting the credit needs for homebuyers not able to obtain financing," Archana Pradhan, chief economist for CoreLogic, said in a 2022 report.

Who qualifies for non-QM home loans?

To qualify for a non-QM loan, borrowers can use alternative income verification methods. This can include bank statements, asset depletion, or rental income. The goal is to help self-employed individuals whose tax returns might not reflect their true earning potential.

Credit scores are just one part of the equation. Lenders also consider a borrower’s overall financial behavior and history. This approach benefits those who may not have high credit scores, but demonstrate financial responsibility in other ways.

Catering to the modern workforce, including self-employed individuals, freelancers, gig workers, and digital nomads, these loans may allow for higher debt-to-income ratios and offer interest-only payment options. These perks may appeal to those seeking lower initial monthly payments.

Borrowers with significant assets, such as money in the bank, retirement, and investment accounts, may also be able to qualify even if their incomes are lower. 

Those seeking these loans should collect bank statements, tax returns, and other relevant documents, ensuring they are up-to-date and easily accessible. They should also make sure to keep all financial records organized and ready for review.

"Get your tax returns and 12-month bank statements (personal and business) ready and come with your dream home price to discuss your options,” said Lloyd.

Challenges and considerations for those seeking self-employed mortgages

Despite the flexibility offered by these loans, they typically have higher interest rates and stricter loan conditions.

Lenders face greater risk when loaning money to individuals with non-traditional sources of income.

Finding lenders that offer non-QM loans can take time and effort. However, the growing demand is leading more lenders to enter this space, making it easier to find a suitable lender.

For many borrowers, the flexibility and benefits of owning a home and having that economic stability outweigh the higher costs or stricter terms.

^{Dusty Lloyd NMLS#247106}