finances

Banks vs. Private Mortgage Lenders for the Self-Employed

Getting a mortgage when you're self-employed can be challenging. There are banks and private mortgage lenders for self-employed borrowers, but your decision will depend on which sources are friendlier for non-traditional applicants.

Amanda HoeyReviewed by

Buying a new home is an adventure, from the excitement of finding the perfect property to the challenge of securing financing. 

Getting a mortgage when you're self-employed can be challenging. Instead of the industry-standard pay stubs and W2s to prove your income, you have bank statements and tax returns. 

The paperwork is inevitable, but the process is easier with some lenders versus others. There are banks and private mortgage lenders for self-employed borrowers, but your decision will depend on which sources are friendlier for non-traditional applicants.

Bank Loans: The Basics

For better or worse, banks are the more traditional source for mortgage lending. They're trusted and reliable with a standardized application and approval process, but there's often less flexibility for a self-employed applicant. 

Regulatory Compliance and the Self-Employed Borrower

Banks are accountable to government organizations like the Federal Deposit Insurance Corporation, which controls the bank's risks by regulating its lending. This is why many banks have firm minimum credit scores and strict rules about approval. Exceptions are unlikely to be part of their process.

Banks also have more limited and conservative loan options. If you don't qualify for a standard loan because of your income history, it's harder to find another route working with a traditional bank.

Working with a Bank: When and Why

Smaller community and regional banks are often more flexible than large national institutions. Decision-makers there are less likely to be bound by strict algorithms, and they usually have more time to spend with you and learn about your needs.

You also get more personal attention if you have an existing relationship with a bank. Bankers often extend lower rates to borrowers with established checking, savings, or investment accounts. 

Private Mortgage Lending

Private mortgage lenders aren't tied to banks or credit unions. They operate independently and set most of their own approval criteria, so they tend to be more flexible than banks.

Benefits for Self-Employed Borrowers

Because they're not bank-affiliated, private lenders don't have to follow the same regulatory agency guidelines. They're still subject to federal and state mortgage lending laws, including the S.A.F.E. Mortgage Licensing Act and the Truth in Lending Act, but they have more flexibility in the approval process. They also close faster because they have less accountability.

Also, while many bank employees work with a variety of financial products, originators working with private lenders typically only do mortgages. They receive mortgage-specific licensure and have to stay abreast of developments in the field. They're often more familiar with alternatives compared to general bankers.

Downsides to Private Lending

Because private lenders set their own terms and lending guidelines, interest rates can vary significantly. That's particularly true for loans with looser approval guidelines since lenders have to protect themselves from non-payment.

Also, some private lenders don't service their own loans. Once you've signed the paperwork and closed on your home, you'll work with another institution, but you'll be locked into the terms you agreed on with the original lender.

Private Loans vs. Bank Loans: Key Differences and How to Choose

There's no one right choice, even for a self-employed borrower. Some strongly prefer to work with private mortgage lenders because they'll look at the borrower's entire financial picture, not just what's listed on an algorithm. 

Others will do more legwork to find a bank that will work with them because they feel more secure with the extra regulations. It's also easier to get in-person service with many banks, an important benefit to some borrowers.

The bottom line is this: Private mortgage lenders have more flexibility, especially for non-traditional and less qualified borrowers, but service is usually less personal.

As you make your decision, think about:

  • Your credit score and credit history: You'll have more options if your credit is good and won't be as bound to non-traditional lenders.
  • How long you've been self-employed: If you have two years of tax returns in the same industry, your process with most institutions will be almost as easy as a traditionally employed person's.
  • Who you bank with currently: Is there a local or regional bank that knows you and your business?
  • Your needs as a borrower: Banks typically offer more personal customer service, especially if you're already a customer.

If you're not sure, shop around. Talk to a few local banks and read reviews of private mortgage lenders online. Ask each provider what rates and terms they might offer you and what the application process is like for a self-employed borrower.

Getting Approved for a Loan When You're Self-Employed

The stronger your loan application, the more options you'll have as a mortgage applicant. A well qualified self-employed borrower has:

  • A debt-to-income ratio of 43% or higher: That means your monthly debt payments (not your regular bills) are no more than 43% of your monthly gross income.
  • A credit score of 700 or higher: The minimum in mortgage lending is 620, but most lenders want to see a higher score if you're self-employed.
  • A down payment of at least 20%: You can get a mortgage with less, but a higher down payment from a self-employed borrower gives a lender more confidence. Plus, you won't have to buy private mortgage insurance.
  • Two years of tax returns: If you're newly self-employed but were recently employed in the same industry, you may be able to fill in the gap with tax forms from your prior employer.

Lenders have different documentation requirements for non-traditional borrowers. The more paperwork you can offer, the happier your lender will be. Aim to have:

  • Two years of bank statements for yourself and your business
  • Profit and loss statements
  • A list of your debts and monthly payments
  • A statement from your accountant attesting to your business's health

Keep all of your documentation, including electronic login information, in a single secure place so it's easy to find if a lender asks. Be ready to account for any large deposits, like down payment gifts from family, and avoid making large purchases or applying for new credit. 

Convert your Home Equity to Cash

Making Your Situation Work: Using the Resources Available

Finding banks and private mortgage lenders for self-employed borrowers can be challenging, but business owners and contractors know how to think outside the box. There are many ways to strengthen your mortgage application.

For example, if you currently own a home, consider EasyKnock’s sale-leaseback programs. Our innovative solutions let you sell your home to EasyKnock and use the money to make a larger down payment, which can get you better rates from many lenders. The best part is you don’t have to move out. Stay in your home as a renter until you’re ready to move to your new home.

Look into EasyKnock today, and add another tool to your self-employed homebuying toolbox.

Amanda Hoey
Content Marketing Manager

Amanda Hoey, Content Marketing Manager for EasyKnock, has applied her experience in public relations and content development to help produce educational and informative content for the financial and real estate industry. She is committed to bringing awareness and knowledge to homeowners about EasyKnock’s home equity loan alternative.

Convert your home equity to cash