Self-employed mortgages: how to qualify for a home loan when you work for yourself

Do self-employed people need a special mortgage?

Usually not. A lot of business owners think they'll need a Non-QM or "alternative" mortgage. Many don't. If your tax returns show enough income after the lender reviews them, you may qualify for the same conventional, FHA, VA or jumbo loans as someone with a W-2 job. That's usually cheaper than alternative loans.

The difference is how your income is shown and figured. A W-2 employee hands over pay stubs. A self-employed borrower hands over a business. The underwriter (the person who reviews and approves your loan) has to figure out how much of what the business earns is steady, ongoing income you can count on.

Under Fannie Mae's rules, you're generally self-employed if you own 25% or more of a business. Sole proprietors, independent contractors paid on 1099s, and partners in a partnership are also treated as self-employed or under similar rules.

How do mortgage lenders figure self-employed income?

Lenders for agency loans (Fannie Mae, Freddie Mac, FHA and VA) usually use a cash-flow analysis, such as Fannie Mae's Form 1084 or a similar worksheet. It starts with the income on your returns. Then it adds back items that lowered your taxable income but didn't actually cost you cash that year.

Common add-backs

• Depreciation, depletion and amortization
• Business use of your home, when properly documented
• Casualty losses and certain other one-time losses
• One-time expenses, when the lender can document that they won't continue

Expenses that still count against you

Normal business costs like payroll, supplies, rent, vehicle expenses (other than any depreciation part) and the non-deductible part of meals generally lower your qualifying income. Some items, like one-time income, may be subtracted if they won't continue.

It depends on how your business is set up

Say you own a partnership or S corporation and want to count business income beyond what you've actually been paid. The lender generally has to confirm the business has enough cash (liquidity) to support those withdrawals. This trips up a lot of owners whose K-1 shows income that stayed in the business.

How many years do you need to be self-employed to get a mortgage?

The general rule for conventional loans is two years of self-employment income, shown with two years of signed personal and business tax returns. Fannie Mae's rules include two important exceptions:

• Less than two years in business. Twelve to 24 months of self-employment can work when your most recent returns show a full year of income from the current business. You also need documented past income in the same or a related field, at a similar or higher level.
• One year of returns instead of two. If the business has existed for at least five years, and you've owned 25% or more of it for five years in a row, the lender may use one year of personal and business returns, along with its cash-flow analysis.

FHA and VA have their own self-employment rules, also built around a history of steady income. Your loan program, your file and the automated underwriting results all affect exactly what's required.

What if my self-employed income went down?

Underwriters care about which way your income is heading, not just the average. If your latest year is clearly lower than the year before, the lender has to decide whether the income is stable before using it. That often means using the lower, more recent number. Or they may ask for a year-to-date profit and loss statement to show the drop has leveled off. A sharp drop that keeps going can mean the income can't be used to qualify.

If you had an unusual year for a clear reason, like a one-time expense, an equipment purchase or a short-term disruption, paperwork and a clear explanation help.

Do write-offs hurt your chances of getting a mortgage? (Talk to your CPA, and talk to me)

Every legal deduction that lowers your taxes also lowers the income a traditional underwriter can use. That's not a reason to give up deductions, and I'm not a tax advisor. It's a reason to plan together.

If you're planning to buy or refinance in the next year or two, the best time to talk is before your returns are filed. Your CPA can weigh the tax savings, and I can show you what each version of your return means for your qualifying income. Sometimes the answer is to file as planned and use a bank statement loan. Sometimes it's not.

Who counts as self-employed for a mortgage?

• Business owners with 25% or more ownership
• Sole proprietors and single-member LLC owners
• 1099 independent contractors, consultants and gig workers
• Commission-based professionals paid as contractors, including many real estate agents
• Physicians, dentists, attorneys and other practice owners
• Owners who also earn W-2 wages from their own S corporation

How do you qualify for a mortgage when you're self-employed?

1. Steady income that's likely to continue, based on the cash-flow analysis
2. A healthy business, which can include confirming the business is active and, for some files, reviewing business financial statements
3. DTI (debt-to-income ratio): how much of your figured monthly income goes to debt payments
4. Credit, assets and reserves (savings left after closing), as with any loan
5. Business money used for closing, which may need review to confirm taking it out won't hurt the business

What documents do self-employed borrowers need?

• Signed personal federal tax returns, all schedules, usually for two years (one year in some cases)
• Signed business returns (1065, 1120-S or 1120) when they apply, plus K-1s
• A year-to-date profit and loss statement and balance sheet, when the lender requires it
• IRS transcripts, through a signed Form 4506-C authorization
• Business license, CPA letter or other proof the business is active
• Personal and, if used, business bank statements for assets

Freddie Mac's automated system can verify certain income, including some 1099 income, using direct-deposit data from your bank account. That doesn't replace a tax-return review in every case, but it can make some files simpler.

When is a bank statement or Non-QM loan a better fit?

If your returns don't show enough income after the cash-flow analysis, a Non-QM option may fit better:

• Bank statement loans use 12 or 24 months of deposits instead of tax returns.
• 1099-only and P&L-only programs figure income from 1099 forms or a profit and loss statement under program rules.
• Asset depletion or utilization programs turn large savings and investments into qualifying income.
• DSCR loans qualify rental properties on the rent instead of your personal income.

These options generally cost more and need more equity. They're tools, not upgrades. I'll show you the comparison so the choice is yours.

How much do I need for a down payment if I'm self-employed?

If you qualify for a conventional, FHA or VA loan, you get the same down payment options as anyone else in that program, including low down payment options. Non-QM loans generally need more equity. Business money can sometimes be used for a down payment, with paperwork showing the withdrawal won't hurt the business.

Pros of qualifying with your tax returns

• Access to agency pricing, usually lower than Non-QM
• Low down payment options in conventional, FHA and VA programs
• No prepayment penalties (fees for paying off early) on agency loans
• Add-backs can make your qualifying income higher than your taxable income

Cons and challenges

• Write-offs lower qualifying income
• Income that's dropping or very new can be hard to use
• More documents than a W-2 file, and more questions
• Partnerships and S corporations add complexity around distributions and business cash
• Timing matters: a newly filed return can help or hurt

Self-employed loan options compared: which is better?

Common questions about self-employed mortgages

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