How to Get a Loan When You’re Self-Employed

By Bill Lyons | Updated on February 5, 2024

Being self-employed comes with its benefits and drawbacks. While you may be your own boss, you’re seen as a higher-risk borrower to lenders because your income is subject to change throughout the year. However, don’t count yourself out yet. 

While finding a loan as a self-employed individual may seem challenging, the most important thing is proving your ability to repay by showing reliable income. 

Even when you make enough to repay a loan, being self-employed can affect your ability to qualify because you take deductions on your tax returns that reduce your taxable income. For example, if you earn $70,000 but have $30,000 worth of expenses, lenders can choose to determine your eligibility on your adjusted gross income (AGI) of $40,000. Additionally, you may have irregular income lenders that can’t rely on to demonstrate your ability to repay. 

That said, there are still plenty of loans designed for self-employed individuals, and as long as you provide proof of income, you can still qualify. Here’s everything you need to know about how to get a loan when you’re self-employed. 

Tips for qualifying for a loan

As a self-employed individual, it’s more challenging to qualify for a loan as most loans are designed for regular employees who can provide proof of income through pay stubs. 

When you work for yourself, you don’t have pay stubs. Lenders see this as a risk, even if you can prove that you earn enough money to repay the loan. However, even though qualifying for a loan may be more challenging when you’re self-employed, it’s still possible. Here are a few tips for how to get a loan when self-employed: 

Gather all your financial documentation

Lenders need to see proof of income, so you should gather any documentation to help you prove your ability to repay the loan.

For example, even though you might not have pay stubs, you can still prove your income with the following documentation:

• Tax returns: Even if you have irregular income, tax returns can show the stability of your income over several years. Additionally, it provides essential information like adjusted gross income (AGI), which considers your income versus expenses, to help lenders understand how much you make after expenses. 
• Bank statements: Bank statements can serve as a replacement for pay stubs and can help you qualify for loans for self-employed individuals. The primary purpose of pay stubs is to show lenders your most recent income information from the last 30 days. Bank statements can provide the same information by looking at how much money you’ve deposited in your accounts versus how much you’ve spent, giving them a clearer picture of your overall financial health and income. 
• Business financial statements: Business financial statements, such as your profit and loss (P&L) statement, will show lenders whether you earn enough after factoring out expenses to qualify for a loan. P&L statements show your income and expenses over a set period, so a 30-day document may prove to lenders that you earn enough to repay the loan. 

Build a strong credit score

Building a strong credit score shows stability and consistency. In addition, your credit score can determine loan eligibility, terms, and how much you can borrow, so a higher credit score is crucial for any loan. 

The higher your credit score, the higher your likelihood of getting approved for a loan. Additionally, if you’re approved for a loan, you can get lower interest rates, which effectively reduce your monthly payments and the total cost of the loan. 

Get a co-signer

A co-signer is someone responsible for paying your debts if you don’t. 

For example, a college student’s parent may be a co-signer on their car loan or apartment. In this case, the parent would be responsible for the debt if the college student fails to pay rent or their car note. 

Co-signers are ideal for individuals with low credit or those who can’t demonstrate their ability to repay. Since a co-signer will be responsible for paying your debts when you can’t, lenders will want to ensure they meet their criteria. Therefore, co-signers should have a good credit score, reliable income, and a low debt-to-income (DTI) ratio. 

Before getting a co-signer, ensure the person understands what it means—that they will be legally responsible for paying your debt if you can’t. Finding a co-signing can be challenging, which is why it’s usually a spouse, partner, or family member. 

Find a specialized lender

Self-employed individuals are unique, so finding a lender with more flexible loan and underwriting options is crucial. Since you take deductions on your taxes and reduce your taxable income, some lenders might not be willing to give you any loan if your AGI is too low, even if you can demonstrate your ability to repay in other ways. 

In most cases, it’s best to work with a specialized lender who understands the nuances of self-employment and finances. Luckily, several lenders create loans for self-employed borrowers, offering better terms, more flexibility, and less stringent requirements. For example, Griffin Funding is a premier provider of non-QM loans for self-employed individuals, and we can use various types of proof of income to determine your eligibility. 

Create a business plan

If you’re taking out a business loan, some lenders will want to see your business plan as part of your application. Your business plan will outline how you’ll spend the money and repay it. 

For example, if you’re a startup and need a loan to launch your business, a lender will want to see a plan to ensure your business can make money even though it hasn’t yet. It will also identify sales trends and projections to create a strong financial profile, including how you plan to make money and how quickly you can begin paying back the loan. 

Best types of loans if you’re self-employed

Finding the best loans for the self-employed is crucial because you must work with a lender that offers more flexible lending criteria and options based on your unique circumstances. 

For example, if you want to buy a house, Griffin Funding offers a variety of mortgage programs for self-employed individuals, including the following:

• Conventional: Conventional loans have strict eligibility criteria that can prevent some self-employed borrowers from securing a home loan. However, some lenders may offer conventional loans for self-employed borrowers who can prove their ability to repay the loan with tax returns and bank statements. Since the lending criteria are strict and self-employed individuals reduce their taxable income with deductions, these loans are harder to secure, so you might need a co-signer or spouse with a W2. 
• FHA: Like a conventional loan, an FHA home loan is more challenging to secure because of your reduced taxable income. However, it’s still possible to obtain an FHA loan while self-employed. To qualify, you must provide proof of business, tax returns, P&L statements, and personal bank statements. Additionally, it will help if you save for a higher down payment, have a good or better credit score, and lower your DTI as much as possible before applying for the loan. 
• Bank statement: Bank statement loans are one of the best options for the self-employed because they have less stringent eligibility requirements. Instead of providing multiple documents for proof of income, you can share as many or as few bank statements with a mortgage lender. However, you must have at least one to two years of bank statements to prove your income. 
• Asset-based: Asset-based loans are another option for self-employed individuals because they allow you to use all your assets to qualify, including bank statements, retirement accounts, and investment accounts. Additionally, you can choose which assets you use to qualify for the loan, and there’s usually no limit to how many assets you use as long as there’s enough money in them to demonstrate your ability to repay the loan. 

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Home loan alternatives

Obtaining a home loan when self-employed can be challenging. Unfortunately, the same is true for home loans. 

Home loans for self-employed individuals may require more proof of income documentation and be difficult to secure. Since personal loans require proof of income, many aren’t designed for self-employed borrowers because their tax returns paint only part of the financial picture. 

Some alternatives to home loans include: 

• Home equity loans: If you’re a homeowner, a home equity loan can help secure the funding you need, from paying for a large purchase to paying off debts. A home equity loan is a second mortgage that allows you to leverage the equity you’ve built in your home by paying your mortgage payments on time every month. With these loans, you’ll be given a lump sum you can use however you want and pay back in monthly installments, much like a credit card.
• 6 month SOFR: SOFR loans are a type of adjustable-rate mortgage. With these loans, you can access lower upfront interest rates and capitalize on reduced interest rates without refinancing your home. 

Get your application ready

Self-employed individuals are at a disadvantage when applying for a loan. Because they reduce their taxable income, tax returns don’t show lenders the whole picture or help them determine a borrower’s ability to repay a loan as effectively as other types of proof of income. 

However, while securing a loan may be more challenging and require more paperwork, it’s still possible for you to purchase the home of your dreams. Griffin Funding works with self-employed individuals to help them find the right loans based on their needs and current financial situation. Apply with Griffin Funding today. 

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.