One Year of Self-Employment: What You Need to Know

So, your client made the leap into self-employment – congrats! Whether a freelancer, small business owner, or contractor, this can be an exciting new chapter. However, when it comes to financing or applying for a loan, the rules around self-employment can get a little tricky. If you are looking to secure a loan or mortgage, there are some important things you’ll need to know about the self-employment history, especially if you're hoping to leverage that income for approval.

The first big thing to note is that to qualify for certain types of loans, you need to have been self-employed for at least 12 months. This means that before you can count your self-employment income, you’ll need to have a full year under your belt in the same profession.

What does this mean? Essentially, you need to show that the self-employment is a continuation of the work– whether as a freelancer, contractor, or small business owner. If you were previously a W-2 or 1099 employee in a similar role, your self-employment income will be evaluated based on how closely it aligns with your prior experience.

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Income Requirements

When it comes to proving the self-employed income, the process is a bit more detailed. Kind Lending will look at:

• 12 Months of Bank Statements: You’ll need to provide 12 months of bank statements that show the income you've earned from your business. The total amount in these statements must meet or exceed the income you made in the previous year as a W-2 or 1099 employee.
• Income Variance: If your current income is slightly lower (up to a 10% variance), that’s okay – as long as your Debt-to-Income (DTI) ratio is 45% or less. But remember, the income has to be consistent over the year to prove financial stability.
• Documentation of Self-Employment: In addition to bank statements, you’ll need to provide proof of the business. This could be a business license, articles of incorporation, or a letter from the CPA. If you're unsure what qualifies, a good rule of thumb is anything that shows you're actively running your business.

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Other Key Requirements

Along with proving your income, there are some other important criteria:

• Credit: Your credit score will play a role in the process too. To be eligible for certain loans, you’ll need to have a minimum FICO score of 660.
• LTV (Loan-to-Value): With Kind, the maximum LTV ratio for 1-year self-employed applicants is 80%. That means you’ll need a down payment of at least 20% if you’re applying for a mortgage.
• Verification of Prior Income: You’ll need to provide a full previous year of W-2 or 1099 with 4506-C verification (W-2 transcripts only).

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At the end of the day, the key to navigating the self-employment loan process is documentation and consistency. If self-employed for at least a year, have your financials in order, and meet the credit and LTV requirements, you’ll be in a strong position to secure financing.

Ready to take the next step? Make sure to check all the boxes, gather the documents, and contact your Kind Lending Account Executive who understands the ins and outs of self-employment income verification.