Being self-employed offers an unmatched level of freedom—between carving out your own path and building a business on your terms—it's incredibly empowering. However, that feeling can quickly turn sour when you need to secure a loan.
It's no secret applying for a home equity loan or HELOC when you're self-employed is challenging. But where there's a will, there's a way. By understanding what you need to qualify and careful planning, you can set yourself up for success.
Self-employment: an overview
Being self-employed means running your own business or working as a freelancer, consultant, or independent contractor. If you receive a W-2, you are not considered self-employed.
Can you qualify for a home equity loan or HELOC if you’re self-employed?
Taking out a home equity loan or HELOC when self-employed is possible. However, you'll likely run into a few hurdles. With the right preparation, you can get the funding you need.
The main differences you’ll experience are:
- Stricter qualifications: Lenders will scrutinize your credit history and overall financial health more closely. Teetering near eligibility will not cut it. You'll need a high credit score, good income, and solid equity in your home.
- A more thorough underwriting process: Since you’re susceptible to fluctuating income, the underwriting process will be more thorough and detailed. Lenders will conduct a deep dive into your financial records to assess the sustainability of your cash flow. Consequently, expect to have a long list of documents to provide and questions to answer.
- Higher borrowing costs: As a perceived risk to lenders, you may face higher interest rates and fees.
Home equity loan and HELOC requirements
As mentioned above, when applying for a home equity loan or home equity line of credit, self-employed individuals will need a stronger financial profile to qualify.
- Home equity: Be sure to own 15% to 20% of your home’s equity.
- Credit check: The minimum requirement for most lenders is 620. However, you will likely need a 680 or higher if you experience income volatility.
- Debt-to-income ratio: The threshold is typically 43%.
How to get a home equity loan or HELOC if you’re self-employed
Assess your financial situation
Before applying for a HELOC or home equity loan, self-employed borrowers should take stock of their situation.
This involves taking a hard look at your cash flow, credit score, and how much home equity you own in your property. You’ll want to ensure your application is strong and that no financial health factors are cause for concern.
Consider:
- Checking your credit report to dispute any errors and increase your score.
- Taking on a part-time job or renting a part of your home to grow your income—and lower your DTI.
- Making small, affordable home improvements or repairs to boost your home value—and equity.
Shop around and prequalify if possible
Requirements, terms, and rates vary from lender to lender and product to product. To find the most competitive offers, explore all of your options and prequalify when possible. This way, you'll have a sense of how much you can borrow and at what cost from multiple lenders. Just be sure to avoid hard pulls, which can lower your credit score.
Prepare thorough documentation
Proving your ability to repay the loan is crucial. Unlike traditionally employed borrowers, who can easily use pay stubs for income verification, you'll have to submit more comprehensive documents.
However, doing so can help build a thorough picture of your financial situation and improve your chances of qualifying.
Before applying, gather:
- Two years worth of personal tax returns
- Two years worth of business tax returns
- Previous W-2s (if self-employed for less than two years)
- Profit and loss statements
- Balance sheets
- Bank account statements
- Investment accounts (if you have any)
Lenders
Though you can apply through any bank, credit union, or online lender, some financial institutions offer products aimed specifically at non-traditional workers. Here is a list of reputable lenders in the space:
Where to find HELOC loans for self-employed individuals:
Where to find a home equity loan for self-employed individuals:
Alternatives when you’re self-employed
Home equity investment
If your employment income fluctuates or is simply too low to qualify for a home equity loan or HELOC, a home equity investment may be right for you. There are no income requirements, making eligibility more manageable for the self-employed.
A home equity investment (HEI) allows you to tap into your home's wealth for a lump sum of cash in exchange for a share of its appreciation. You can access up to $500K and even prequalify for an HEI without impacting your credit or committing to applying.
There are no monthly payments, improving your cash flow, which can be particularly helpful for self-employed individuals. Rather, you repay the investment anytime during a flexible 30-year term via cash-out refinance, home sale, or another source of funds, such as your savings.
Requirements: You'll need sufficient equity and a credit score over 500 to qualify.
Considerations: Because HEIs are repaid via a balloon payment, it's critical to have a buyback plan.
Cash-out refinance
A cash-out refinance replaces your existing mortgage with a new, larger loan. The difference between the old and new mortgage balance is given to you in cash. You can use your funds to accomplish whatever you need, like tackling home improvements or kickstarting a new venture.
It’s important to note that when you change your mortgage, your terms and rate can change, too. Therefore, it’s only best to refinance when you can secure a lower rate.
Requirements: To qualify for a cash-out refinance, you typically need significant home equity, a good credit score, and a stable income.
Considerations: Cash-out refinances offer lower interest rates than other borrowing forms, such as personal loans or credit cards. However, they also increase your mortgage balance and extend the repayment period, which can lead to higher overall interest costs.
Business line of credit
A business line of credit works similarly to a credit card. You can use funds as needed, paying interest only on the amount borrowed. These revolving lines of credit generally range from $10,000 to $250,000.
Requirements: When applying, lenders generally consider your business's financial health more than your personal finances. You'll need a good credit score, solid business financials, and sometimes collateral.
Considerations: Business lines of credit offer rates that are better than credit cards but less competitive than equity financing products. You'll also be responsible for annual renewal.
SBA loan
A Small Business Administration (SBA) loan is a government-backed loan designed to help you cover various business-related expenses, like working capital or refinancing existing debt. You can access anywhere from $500 to $5.5M depending on your financial health and the health of your business.
The loans often offer favorable terms and lower interest rates. You'll be responsible for fixed monthly payments over a repayment term that can last up to 25 years.
Requirements: You must be a for-profit business within the U.S., have strong business financials, a great credit score, and a detailed business plan.
Considerations: SBA loans can be an excellent option if you're looking to secure a competitive rate. However, the application process is lengthy and thorough, while approval is challenging. Funding can range anywhere from 30 to 90 days, depending on the complexity of your application.
Personal loan
If you need cash for nonbusiness-related expenses, consider standard personal loans. They can be used for various purposes, like home improvements or debt consolidation.
Personal loans range from $1,000 to $100,000 and offer an interest rate of 7% to 36%. Repayment consists of fixed monthly payments over 1 to 7 years.
Lenders weigh credit history and DTI more heavily than work history when determining eligibility—making them a sound option for self-employed borrowers.
Requirements: Credit score requirements vary from lender to lender, so getting a loan with bad credit is possible. However, you can expect a higher borrowing cost.
Considerations: Personal loans typically have higher interest rates than secured loans but don't require collateral.
Final thoughts
You chose to be self-employed for a reason—whether you wanted unlimited flexibility or to build something that is truly yours. The challenge of securing a loan to better your finances shouldn’t offset that.
While it’s true that when applying for a home equity loan or HELOC, self-employed individuals have the burden of proving their ability to repay the loan, you now know how to do so effectively.
By preparing thorough documentation, maintaining a strong credit profile, and exploring all available options, you can be well on your way to funding.
If you’re self-employed and looking for a home equity solution, consider a Home Equity Investment from Point – a home equity product built for your needs.
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