Construction financing for the self-employed

Why is it more difficult for self-employed people to get a real estate loan?

Anyone who wants to buy a house or condominium usually relies on a low-interest mortgage . Combined with their own savings, this can be used to purchase the desired property. However, to obtain a loan, you must be creditworthy. Banks also refer to this as "creditworthiness." 

To determine this, credit institutions primarily consider the applicant's regular income . The problem with home financing for the self-employed and freelancers is already evident in the term "regular." After all, self-employed people don't receive a fixed salary like employees. However, by taking out a home loan , homeowners assume the obligation to repay the loan over many years. 

While the bank views it positively if a self-employed person currently has a high income, if orders drop in the future, the earnings situation can change quickly. The bank is also aware of this. Due to the potentially fluctuating income, it is somewhat more complicated for self-employed people to obtain real estate financing . 

Hurdles for self-employed and freelancers in real estate financing

Home builders and property buyers who are neither civil servants nor employed face additional hurdles when it comes to obtaining financing. If you want to buy a home as a self-employed person, you, like employees, must convince the bank of your ability to pay . The following factors play a major role in the loan approval process:

Income is particularly important for self-employed people when it comes to mortgages

Self-employed individuals and freelancers don't have a fixed income . Their income may rise or fall over the next few years. Therefore, it's uncertain whether the borrower will be able to pay the monthly installments in the future. Because of this increased risk of loan default, banks review mortgage applications from self-employed individuals particularly thoroughly. 

Do you generate investment income, rental income, or other income? These can also be included in your loan application. Equity is also important when applying for a home loan. To successfully overcome the hurdle of the credit check , you should also have some savings. 

A large amount of equity reduces the risk of default for the bank. This, in turn, increases the chances of getting a loan if you're self-employed and want to buy a house. 

Industry crucial for lending to buy a home

Freelancers such as doctors, lawyers, veterinarians, or architects generally have fewer problems obtaining a loan. The chances of freelancers and self-employed individuals in other professions, however, depend on the assessment of the respective bank. The process is usually most difficult for business owners: Some credit institutions generally rule out lending to them, while others categorically reject certain sectors such as construction, taxis, or the restaurant and hotel industry because they consider them particularly risky. 

The length of time and success of the client's self-employment also impacts real estate financing. Lenders usually require that the potential borrower has been operating their business for at least three years—so start-ups are at a disadvantage.

Therefore, the customer should provide all relevant documents – the self-disclosure, business results for the past three years in the form of balance sheets or profit and loss statements, income tax assessments, etc. – during the initial meeting with the bank. It is also advantageous if the customer can explain to the bank how they intend to compensate for any loss of income caused by illness or poor business performance.

Additional effort for bank and borrower

Employees or civil servants only need to submit pay slips for the last six months for credit approval. For self-employed individuals and freelancers, however, banks require tax returns or income statements for the last three years. In some cases, the lender may also request additional documentation.

Construction financing: self-employed and employees in comparison

As mentioned, the application process for a mortgage loan is somewhat more complex for self-employed individuals than for employees. Furthermore, both employees and self-employed individuals must determine the maximum amount they can spend on the loan repayment. The procedure is the same for both and can be calculated using the following rule of thumb: 

Total monthly income - total monthly expenses (excluding rent) - financial buffer = surplus

You then use the surplus to repay the loan. If you're self-employed and want to buy a house, however, you shouldn't just consider current expenses when calculating your monthly expenses minus rent. Owners of apartments and houses also have to pay maintenance fees and set aside reserves for maintenance. 

Furthermore, self-employed individuals are advised to set a somewhat more generous financial buffer . This will allow them to reliably meet their mortgage payments even if their income declines in the coming years. 

Slightly less favorable conditions for the self-employed

Since self-employed individuals and freelancers don't have a reliable long-term income, banks calculate a higher risk of loan default. This is particularly reflected in the interest rates on mortgages. Self-employed individuals must expect slightly higher interest rates than employees . This makes the loan more expensive, and monthly installments tend to be higher. 

Furthermore, unlike employees, self-employed individuals often need another person to secure a mortgage. This could be a partner, for example. The lender hopes to minimize the risk of default. 

Type of self-employment influences real estate financing

While civil servants and employees have an easier time obtaining construction financing, the chances for self-employed individuals also depend on their specific activity. For example, successful business owners have been able to obtain real estate loans for many years.

However, it's significantly more difficult for start-ups or self-employed students to secure mortgages than for employees. Nevertheless, there are options that pave the way to homeownership. Baufi24 advisors are happy to provide information about financing options . 

The following table clearly compares the differences between employees and self-employed people regarding building financing:

What options do self-employed people have when it comes to building financing?

Annuity loans and variable loans

Anyone looking to take out a real estate loan has a variety of options to choose from. This applies to both self-employed and employed individuals. The most common form of mortgage financing is the so-called annuity loan . This provides good planning security. 

With an annuity loan, you pay a constant monthly rate over an extended period . This includes a principal and an interest component. The latter depends on the loan amount and the nominal interest rate.

A special advantage: With an annuity loan, the bank sets a nominal interest rate at the time of contract conclusion , which remains unchanged for several years ( fixed interest rate ). This gives the borrower the opportunity to secure low interest rates today for the future.

As an alternative to an annuity loan, a variable-rate loan can also be a suitable financing solution for the self-employed. The term "variable" here refers to a variable interest rate. This is not fixed for a long period of time, but is regularly adjusted to the prevailing market rate.

The advantage of a variable-rate loan lies in its flexibility. This is because it can be terminated at short notice. Furthermore, a variable-rate loan usually allows for unscheduled repayments of unlimited amounts. If you, as a self-employed person, have more capital available in the future, you can use it directly for real estate financing. While unscheduled repayments are also permitted with an annuity loan, they are limited.

Loan agreements for the self-employed – what to look out for

An annuity loan is often the right choice for repaying a real estate loan. However, self-employed individuals who choose this option should request the right to make early repayments . Otherwise, the bank may charge prepayment penalties for unscheduled repayments.  

Furthermore, even with the best planning, it can happen that you, as a self-employed person, are unable to pay the agreed loan installments for a few months. In this case, it makes sense to take advantage of a repayment deferral on your real estate financing . However, this right must be documented in writing in the loan agreement beforehand. The Baufi24 specialists are happy to provide information on which banks offer the most rights when it comes to mortgages for self-employed individuals and freelancers.

Buying a house as a self-employed person: Additional funding options

Just like employees, self-employed people can take advantage of additional subsidies to finance their home purchase. For example, the Kreditanstalt für Wiederaufbau (KfW) offers attractive loans for home builders and property buyers. However, such a KfW loan usually only covers part of the required purchase price. The remainder can be financed through an annuity or variable-rate loan.

Those who still have some time before buying a home can also take out a building savings contract . This allows them to both save up a balance and later pay out a loan. A building savings contract goes through these three phases:  

The savings accumulated over the years, combined with the loan subsequently provided, form the building savings sum. This allows self-employed individuals to purchase their desired home.

Increase chances of attractive real estate financing for the self-employed

A self-employed person interested in mortgage financing faces more hurdles than an employee. This is precisely why it's important to prepare carefully for this step. Baufi24 advisors will explain to you here how you can significantly improve your chances of getting a loan approved.

Sufficiently high income and equity

Income is a key factor when it comes to granting a home loan. But how high does it need to be? Banks do n't officially require a minimum income. However, it's well known that credit institutions generally set a flat rate of around 40 percent of net income for an adult's living expenses.

Borrowers can deduct an additional €200 for a motor vehicle. After deducting the costs from income, you must still have a sufficient surplus. This can then be used to pay the installments.

When making loan decisions, banks consider both income and equity . Baufi24 experts therefore recommend that self-employed individuals and freelancers use their own savings to raise at least 20 percent of the purchase price for a real estate loan. This contribution can be used to cover, among other things, the additional purchase costs incurred during the purchase. Furthermore, a high equity ratio reduces the risk of loan default for the bank. Consequently, it offers the homebuyer lower, and therefore more favorable, interest rates.  

Successful, creditworthy self-employed people are more likely to receive real estate financing

Have you been self-employed for several years and earn a solid income? This significantly increases your chances of getting a loan. Before applying for a home loan , you should have been self-employed for at least three years . Furthermore, banks view high incomes with only minor fluctuations as a positive.  

The bank also provides real estate financing for self-employed individuals, provided they have a solid credit rating. To determine this, credit institutions typically obtain a SCHUFA credit report. This provides an assessment of past payment behavior and current financial situation. If the credit rating is positive, the chances of obtaining a real estate loan increase. However, with a negative SCHUFA entry, a loan approval is very unlikely.

Offer the bank additional security

Self-employed individuals face the disadvantage of not being able to demonstrate a steady income to the bank. However, lenders may be persuaded to provide other, additional collateral . These include:

The above points constitute material collateral. Personal collateral is also an option for obtaining construction financing. For example, your permanent employee can provide a surety or guarantee for you. With this additional security, banks are often willing to grant the desired loan.  

To ensure the bank can obtain an accurate picture of their financial situation, every self-employed person applying for a mortgage must provide proof of income for the past three years. Suitable sources for this include income tax assessments, income statements, and business accounts.

Find providers of construction financing for the self-employed and freelancers

The number of providers offering mortgages to self-employed individuals is limited, but the number is growing. Those who use professional brokers increase their chances of finding the right lender.  

As is common with mortgage lending, bank terms can vary considerably. However, all providers typically charge a flat risk premium of approximately 0.1 percent; at the very least, the risk assessment is based on a different basis than for prospective borrowers with permanent employment. In many cases, banks also require a high equity ratio for loan approval.

There's no denying it: Getting real estate financing as a self-employed person is a bit of a challenge. This makes it all the more important to have an experienced partner to guide you: Baufi24 experts support all self-employed people in finding a suitable construction loan.  

To do so, they compare offers from more than 500 banks. If you, as a self-employed person, would like to realize your dream of owning your own home , schedule a free, no-obligation appointment with one of our experts now – online, by phone, or in one of our branches throughout Germany.