When you are your own boss, getting a mortgage means you need to jump through more hoops than other buyers. Now, because of the pandemic and the disruption many companies have suffered—it’s harder for self-employed business owners as well as 1099 contractors to get a loan.

You typically need to have been working for yourself for at least two years and have a healthy balance among your business and personal bank accounts before you'll be able to get bank financing. As a result of the pandemic, your profits and losses now will face additional scrutiny and lenders will want to see documentation that money is going into your business account at a consistent rate. 

Here's what you'll need in order to get a mortgage:

A pre-approval letter

Ami Rosen, a home lending officer with Citi, says his most important advice to anyone who is self-employed and wants to buy is to get an "iron-clad pre-approval letter," indicating a bank has thoroughly reviewed your finances.

This is important even before you go apartment hunting, says Brittney Baldwin, vice president of National Cooperative Bank (and a Brick Underground sponsor), "as it may show you what other information may be required during the loan process."

Evidence of two years of self employment

To show a consistent income, lenders like NCB and Citi recommend having two, full years of self-employment income. Rosen says with one year or less of self-employment, it's impossible to gauge what your income will look like, especially in these uncertain times. 

"If you are leaving your job at a hedge fund or medical practice to start out on your own we are not going to take into account any of your previous income unless we see a proven track record of making money on your own," he says.

During the gap between the beginning of the year and the tax filing deadline in April, lenders will want profit and loss statements for the first part of the year and supporting bank statements. Business owners technically can file their tax returns in September or October says Jacqueline Frank, vice president of mortgage lending at Guaranteed Rate, and if they need a mortgage "they need to file earlier in the year,” she says.

Business bank statements

Your most recent business bank statements will confirm your monthly deposits and expenses and must match your tax filings, and your profit and loss statement for the year to date. 

Providing a business bank statement is a new requirement ushered in during the pandemic, Frank says. As an example, she says a client of hers who owned a dance studio was forced to close at the beginning of the pandemic and it wasn’t until she began offering online dance classes that revenue picked back up. Her loan could not be approved until three months of business bank statements showed the studio owner could again support her salary and payroll.

Lenders will compare your business bank statements, with your profit and loss statement and the most recent tax filings when considering a loan. 

Frank points out that for business owners with seasonal businesses, like landscapers for example, it can be very challenging.

If you have no business activity, you won’t be able to close until you prove that you have cash coming in. “This can be done with current business contracts in place or some other form of proof of activity,” Rosen says. 

Balanced personal accounts

An important part of getting a mortgage is being able to show consistent capital gains income. This is nothing new. Self-employed New Yorkers are able to write off losses, carrying costs, and repairs against their business income, but if you write off too much it ends up reflecting a negative income, and that will impact your chances of getting a mortgage. 

"If you are showing negative income and we can’t add back certain portions of the income, you are not going to qualify for any mortgage, let alone a million-dollar mortgage, so it’s very important to be upfront before you make an offer," Rosen says.

You'll also need to consider how you use money from your business account. Rosen says if the down payment is coming out of a business account the lender is going to want to know whether that affects your business. "In those cases, we’ll want certified public accountant letters stating the use of business funds will not negatively impact the business," he says. 

The right lender

There are so many different types of self-employment, it's worth finding someone within the bank you are using who is well versed in your type of self employment. "No two snowflakes are alike and you have to look at each person individually," Rosen says. 

A co-signatory option

You might want to consider having a co-signatory—in mortgage speak this is a non-occupant co-borrower. Rosen says this option is often a route for young people who are starting out, don't have multiple years of employment behind them and have a parent who has a strong financial profile who can help.

The co-signatory "can use their income and assets to help qualify a borrower that might not otherwise get a loan," Rosen says. 

Exceptions for those with high net worth

If you are self-employed and are in the fortunate position of having lots of money in the bank, you may be able to get a mortgage even if your business shows losses. Rosen says a bank can calculate income by asset depletion.

"We can create an income figure from your asset portfolio. The ultra high net-worth who are self-employed can qualify, where others with lesser liquid assets might not be able to," he says. 

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It might seem counter intuitive: Even though rents have fallen in New York City, a greater number of renters are enlisting the help of a guarantor in order to qualify for the apartment they want.

One explanation is that the current rental market represents an opportunity for some renters to trade up in NYC. Using a guarantor—on top of the lower rents and other deals landlords are offering to fill the many vacant apartments—can boost your spending power and get you more space, nicer amenities, or a better location—or all three.

In other cases, anecdotally it appears that New York City’s rents are low enough to draw New Yorkers who earn less, including civil servants who couldn’t afford to live in Manhattan before. And some of them are turning to guarantors in order to secure their apartments.

Joshua Young, vice president of market rate operations for Clinton Management, the property management arm of Douglaston Development, says his firm’s entry level studios and one bedrooms have seen a 50 percent increase in the use of guarantors over the past 60 days.

Young says teachers and nurses looking to rent in NYC are still falling short of income requirements (starting salaries for teachers range from $57,845 to $87,510; the average registered nurse salary in New York is $85,610).

Landlords generally want tenants that earn annual salaries of 40 times the monthly rent, plus have good credit, so someone who earns about $85,000 likely qualifies for an apartment that rents for around $2,125.

Adam Frisch, senior managing director of leasing at Lee & Associates, also sees more civil servants like fire fighters and teachers among the new tenants at his buildings.

“These people have strong unions and job security,” he says, noting that while their incomes are lower than the many lawyers and bankers who have left the city, “they are more secure.”

Covid has made NYC affordable

He points out that Covid has made it possible for civil servants to rent on the Upper East Side, namely doorman buildings with 500 to 600 apartments—and that’s where renters who need the help of guarantor are more likely to get a lease, Frisch says. These buildings have so many units to rent, he says, and are more willing to take guarantors.

For example, the average rent on a non-doorman studio on the Upper East Side fell 3.7 percent to $1,787 in December, according to the most recent Manhattan rental market report from MNS. That was the second least-expensive rent for non-doorman studio in Manhattan behind Harlem.

Trading up within the building

Young says some renters are upgrading to larger apartments in their buildings and using a guarantor to “close the gap.”

“Since they already qualified for the one apartment and have good rental history,” Young says, “they are using a guarantor to close the gap on a more expensive apartment.”

He offers an example of a renter with a 600-square-foot, one bedroom on the seventh floor who wants to upgrade to a 700-square-foot, one bedroom on the 35th floor with water views. If their annual income falls “short on the 40 times [the monthly rent] they will have a parent or institutional guarantor close the gap,” he says.

Trading up in this manner is for renters of higher-priced apartments, he says.

“These tenants are smart and financially responsible and do not want to live outside of their means just because someone else is on the hook for it,” Young says.

Renters can turn to either personal guarantors—like a friend or family member—or institutional guarantors, which sets a lower threshold for the amount you need to earn in exchange for a fee.

Consider the renter who earns $80,000 and has good credit. On their own, they likely qualify for a $2,000 a month NYC apartment using the standard formula of 40 times the monthly rent—but if they use a guarantor they can try to upgrade to a much pricier apartment with nicer amenities, an important consideration when you’re spending more time at home.

How to qualify with a guarantor

If that renter uses a personal guarantor, Young says they qualify for an apartment if the guarantor makes 80 times the rent. So with a guarantor who earns $400,000 per year, you could live in a $5,000 a month apartment.

If you didn’t have a family member willing to be a guarantor, you could turn to an institutional guarantor like Insurent Lease Guaranty (a Brick Underground sponsor) which will qualify a tenant for 27.5 times the monthly rent—so the tenant who earns $80,000 can go for an apartment asking $2,900 a month—and these days you can rent an apartment in a prime neighborhood in Manhattan for that amount. (A search on StreetEasy for apartments in Manhattan with two or more bedrooms for $2,900 a month turned up 42 listings—including some three-bedroom apartments in Hudson Yards, Upper West Side, the Upper East Side, the East Village, and Greenwich Village. All were no-fee and most offered two or three months free.)

Many New Yorkers are often a little below the landlord’s requirement of 40 times the monthly rent, says Charles Schoenau, managing director at Insurent.

Renters who are not working because they are students; in between jobs; or are entrepreneurs and do not take a salary during the year, or have a very low salary; or are retired and do not work are also eligible to use Insurent.

Renters in this scenario can qualify if their parents or family friends either earn a combined income of 50 times the monthly rent, or have 80 times the rent in bank or brokerage accounts—the amount is high because the thinking is they would need to cover their own expenses in addition to yours.

And those who do not work (such as students, retirees or New Yorkers who are in between jobs or are entrepreneurs and who do not make 27.5 times the monthly rent from a job) can also qualify with Insurent on their on their own if they have 50 times the rent in bank/brokerage accounts in their own name(s).

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