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Home Equity Line of Credit (HELOC) for Self-Employed Borrowers

happy self employed homeowner checks her approved home equity loan application on her laptop

If you are self-employed and run your own business, you might be wondering if you can still get home equity loans, including HELOCs, and how different the process might be. The short answer is that it won’t be that much different. Self-employed HELOC qualification requirements, however, tend to be more strict, and there’s typically more paperwork involved in order to document the stability of your income. 

Self-employed individuals typically run their own businesses. It can also include gig workers such as rideshare drivers, dog walkers, freelancers, and more. Since lenders view this type of income as less stable, it will be scrutinized more closely. 

Read on as we’ll go through what lenders consider when reviewing your loan application as a self-employed borrower, the documentation you’ll need to provide, and how it could affect your loan terms. 

Am I considered self-employed?

For home equity loans, you are considered self-employed if you have 25% or more ownership interest in a business. This is true for many types of loans, such as FHA and conventional loans. You’ll also be considered self-employed if you are a gig worker, which can include things like rideshare drivers, freelancers, and independent contractors. As a general rule of thumb, if you receive a tax form 1099 instead of a W2 showing your annual income, you’re likely considered self-employed for purposes of a home equity loan. 

Self-employment comes in several different forms and includes a sole proprietorship, partnership, S-Corporation, and a C-Corporation. If you’re not sure which one you fall under, you can review your personal and business tax returns. You can also check with your accountant.

If you’ve filed tax returns, below are the tax forms you’ll find depending on the business structure you’ve selected:

  • Sole proprietorship: Schedule C (found on your personal tax return form 1040)
  • Partnership: IRS form 1065 (filed as a separate business tax return)
  • S-corporation: IRS form 1120-S (filed as a separate business tax return)
  • C-corporation: IRS form 1120 (filed as a separate business tax return)

What documents do I need as a self-employed borrower?

As a self-employed borrower or gig worker, documentation requirements tend to be more comprehensive if you want to get a home equity loan. This is because lenders view borrowers who run their own companies to be at higher risk of default. 

Personal tax returns (2 years)

You’ll typically be asked to provide proof of your most recent two years of personal tax returns. Most lenders will require the first two pages in addition to additional “schedules” that were filed with the IRS. Make sure to provide the most recent copy of the tax returns filed, especially if you filed an amended return afterward. 

If you’ve filed an extension, provide proof of payment of any estimated amount of taxes owed. In this scenario, lenders may request three years of tax returns. 

Business tax returns (2 years)

With the exception of sole proprietors who only file a Schedule C on their personal tax returns, all other self-employed professionals should be prepared to provide the most recent two years of business tax returns. As with personal tax returns, the same guidelines apply for things like amendments and extensions. 

Depending on your tax filing structure, you should also make sure you provide the lender with Schedule K-1’s, if applicable. This is a critical piece of the tax return that lenders use to determine your qualifying income for purposes of the loan. 

Pay stub and W2s

Not all self-employed professionals will have these items, but if you paid yourself a salary, you should also have a W2 and current pay stub that indicates the wages you’ve paid to yourself. Be prepared to provide the most recent two years’ worth of W2s and your most recent pay stubs indicating your year-to-date wages earned.

Year-to-date financial statements

Additional financial statements such as balance sheets, profit and loss statements, and explanations for fluctuations in business income may be required. This depends on the lender’s evaluation of your business. These items are rarely used as a primary source of determining your qualifying income, however, they can still be important in documenting the strength of your business finances. 

For example, businesses that suffered a significant decline in income over the past year can make a strong case that operations have since stabilized if supported by a current profit and loss statement and balance sheet. 

How do lenders evaluate a self-employed homeowner’s income?

Tax returns will be the main determining factor lenders use when evaluating self-employed homeowners. This means that certain deductions, while they may have helped reduce your taxable income to the IRS, could end up hurting you when it comes time to apply for a loan. 

As a simplified example, a business that earned $100,000 in income for the year but wrote off $40,000 in expenses may be qualified for a home equity loan based on $60,000 in income. 

Tax returns

Few lenders will publicly share the exact methodology used in determining your income. However, Fannie Mae publishes an income worksheet that is accessible to anyone. This income worksheet details which line items on your tax returns can be added or deducted from your business income. 

Individual lenders may have slight variations in how they evaluate your income. However, since most conventional lenders sell their loans on the secondary market in accordance with Fannie Mae guidelines, the income worksheet referenced above should give you an accurate representation of how most lenders will determine your qualifying income. 

Note that it’s not likely that your home equity loan will be sold on the secondary market, but most lenders follow the same methodology for purposes of consistency.

In the vast majority of cases, lenders will review your most recent two years’ worth of tax returns and take the most conservative average between those years in determining your ability to repay the home equity loan. 

In other words, if you had a significant increase in income last year, lenders will most likely average it with your lower income from two years ago. Similarly, if your income decreased last year, lenders will most likely credit you for a one-year average in income. 

Is it harder to get home equity loans if I am self-employed?

Unlike other types of financing like personal loans, it can be harder to get a home equity loan as a self-employed borrower or gig worker. Compared to traditional W2 employment, you need to demonstrate a longer history of self-employment income for it to be considered stable. Your income trend will also be reviewed over a period of at least two years. 

In calculating your qualifying income for purposes of the loan, lenders also use what you’ve reported to the IRS on your tax returns. Since most businesses write off expenses to reduce the amount of taxes they have to pay, excessive write-offs can make it difficult for you to get approved for a loan as it can lead to a debt-to-income ratio (DTI) that exceeds the lender’s limits. 

Do self-employed borrowers get different home equity loan interest rates?

No. Lenders typically offer the same home equity loan rates, whether it is a variable or fixed interest rate. One of the few exceptions is if a lender considers your debt-to-income ratio in determining its interest rates. If this is the case, you may see a slightly higher interest rate because most lenders take a conservative approach in evaluating self-employment income. 

Other home equity loan requirements

Besides the evaluation of income, gig workers and self-employed borrowers must adhere to the same requirements as other types of borrowers when it comes to getting a home equity loan or home equity line of credit. Some of these requirements include an appraisal inspection, an evaluation of your credit score, and proof of assets. 

Appraisal inspection

An appraisal inspection is designed to provide a lender with an estimate of what your home is worth, how much equity you have, as well as your loan-to-value ratio. This is also done to verify the condition of the property and whether there are any health or safety hazards present. 

This is usually an in-person appointment. However, depending on the lender or your property location, you may be able to get a home equity loan with only a computerized estimate of your home’s value. 

Credit score evaluation

For most lenders, minimum credit score requirements are the same regardless of whether a borrower is self-employed. Besides your credit score, lenders will also look at other items on your credit report like your payment history, recent applications for credit, and any derogatory information such as collections, charged-off accounts, or bankruptcies. 

Bank statements

For conventional loans and most other loan types, asset requirements remain unchanged for self-employed borrowers. You can be expected to provide proof of the most recent one to two months of bank statements if proof of assets is needed to satisfy requirements for reserves or cash to close to pay for closing costs. 

Getting home equity loans as a self-employed borrower

Self-employed individuals can rest easy knowing that getting a home equity loan or home equity line of credit is not that different. You’ll still have access to these financing options to get a lump sum of cash for the down payment on a new home, consolidate high-interest debt, cover unexpected expenses, or help with other financial goals.

Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.

Andrew Wan

Written By Andrew Wan

With a decade of experience as a mortgage underwriter and a licensed California real estate broker since 2018, Andrew Wan use his expertise and experience to share insights on the housing industry. He covers a wide variety of topics, from buying a home to what the home loan process entails, and enjoy sharing tips to help better prepare you for how to make it all a seamless experience.