On this page
- Why is it harder to get a mortgage when you're self-employed?
- How do lenders look at self-employed income?
- How to prepare 12 to 24 months before you apply
- What types of mortgages are there for self-employed borrowers?
- Which self-employed mortgage is right for you?
- How do I explain deposits to a mortgage lender?
- What documents do I need for a self-employed mortgage?
- Common mistakes self-employed borrowers make
- Questions
- Sources
Why is it harder to get a mortgage when you're self-employed?
A W-2 employee hands over pay stubs, and the lender sees a steady number. When you own the business, the lender has to figure out what the business really pays you after expenses. They also have to judge whether that's likely to continue.
Fannie Mae's Selling Guide (B3-3.5-01) considers you self-employed when you own 25% or more of a business. For conventional loans, the lender reviews your tax returns and must do a cash flow analysis, such as Fannie Mae's Form 1084. That form starts with your taxable income and adds back certain non-cash deductions, like depreciation (a tax write-off for wear on equipment or property).
The key point: underwriters (the people who approve the loan) generally start from the income you reported, not the income you made. Every deduction that lowers your tax bill can lower the income you qualify with, too.
How do lenders look at self-employed income?
Under Fannie Mae's guidelines, here's what matters on a full-documentation (tax return) loan:
- History. Fannie generally looks for two years of self-employment earnings. Less than two years can work if your most recent signed returns show a full 12 months of income from the current business, and you earned the same or more before in the same field or a similar role.
- Tax returns. Usually two years of signed personal returns, plus business returns where required. Fannie allows one year of returns in some cases, including when the business has existed for five years and you've owned 25% or more for five years in a row.
- Trends. The lender compares year over year: gross income, expenses and taxable income. Steady or rising income is simple. Falling income gets a closer look, and the lender may use the lower year or ask for an explanation.
- Business strength. Location, type of business, demand for what it sells, and whether it can afford to keep paying you.
- Business assets. If you'll use business money for the down payment, closing costs or reserves (savings left after closing), the lender must confirm taking it out won't hurt the business. That may mean business bank statements or a balance sheet.
Most lenders also have you sign an IRS form that lets them get your tax transcripts. So the returns you provide must match what you filed.
How to prepare 12 to 24 months before you apply
- Talk with your CPA about the mortgage, not just taxes. Have an honest talk about the trade-off between lowering taxable income and showing enough income to qualify. Your CPA decides tax strategy. I can show you what different net income levels mean for qualifying. Ideally, both talks happen before the returns are filed, not after.
- Keep business and personal money separate. Use dedicated business accounts. Pay yourself on a regular schedule by transfer. Mixed accounts make deposits hard to explain and can cause problems with a bank statement loan later.
- File on time. If you file on extension, your latest year may not be available when you apply. That can mean using older numbers or waiting. Plan your filing around when you want to buy.
- Keep deposits clean and documented. Avoid large cash deposits you can't trace. Keep invoices, 1099s and payment app records that match your deposits.
- Watch your debt and credit. If you personally guarantee business debt, it can show up on your credit report. Know which business bills are personal and which the business pays, and keep records to prove it.
- Build reserves. Lenders like to see cash in the bank after closing. Business owners benefit from this cushion more than anyone.
- Get an early review a year out. Send me your last two years of returns. I can tell you how an underwriter will likely read them and whether a different type of loan is worth a look.
What types of mortgages are there for self-employed borrowers?
There are four main ways self-employed borrowers can prove income. The first is the standard way. The others are Non-QM options (loans outside the standard government and Fannie/Freddie rules), with their own guidelines that vary by investor.
Full documentation (tax returns)
Conventional, FHA, VA and USDA loans qualify you on tax returns. If your returns show enough income, this is usually the least expensive path with the widest choice of loans. More on my self-employed mortgages page.
Bank statement loans
Instead of tax returns, the lender reviews 12 or 24 months of personal or business bank statements. It figures your income from qualifying deposits, often subtracting an expense factor (an estimated share for business costs) on business accounts. It fits borrowers whose deposits tell a stronger story than their returns. See bank statement loans.
Profit and loss (P&L) programs
Some Non-QM programs qualify you using a P&L statement (a summary of business income and expenses). It's often prepared or checked by a CPA or other licensed tax preparer, and sometimes paired with bank statements. Rules differ a lot from one investor to the next.
Asset depletion and asset-based programs
If you have large savings, investments or retirement accounts, some programs figure a qualifying income from those assets instead of business income. That can help business owners who are winding down, between ventures or have uneven income. See asset depletion loans.
Which self-employed mortgage is right for you?
| Your situation | Option to look at first | Why |
|---|---|---|
| Two years of returns show enough net income | Full documentation | Usually lower cost and the most loan options |
| Strong sales, but big write-offs lower taxable income | Bank statement loan | Qualifies on deposits instead of taxable income |
| Less than two years self-employed, same field as before | Full documentation (if 12+ months on returns), otherwise discuss options | Fannie allows less than two years with prior related income |
| Latest year's return not filed yet | Talk timing first | May use prior year numbers or wait, depending on dates and program |
| CPA-prepared P&L shows current income better than returns | P&L program | Some investors accept CPA-prepared P&Ls |
| Large savings or retirement assets, modest or uneven income | Asset depletion | Income figured from assets, not the business |
| Buying a rental property | Compare conventional with DSCR | DSCR qualifies on the property's rent |
Non-QM options generally cost more and require more equity than conventional loans. The extra cost can be worth it. But if you qualify for both, you should see them side by side.
How do I explain deposits to a mortgage lender?
Whether your loan uses tax returns or bank statements, unexplained deposits slow things down. Underwriters want to know where money came from, especially when it's large compared to your income.
- Keep a simple log of large deposits with the source and a supporting document
- Avoid moving money back and forth between accounts during the months you'll send in
- Transfers between your own accounts should show both sides
- Loans, refunds and one-time sales of things you own usually don't count as income, so document them separately
- If a client pays through a payment app, keep the app's reports
What documents do I need for a self-employed mortgage?
- Personal federal tax returns, signed, with all schedules (usually two years)
- Business returns (1120S, 1065 or 1120) with K-1s, if they apply
- Year-to-date profit and loss statement, if requested
- Business license, CPA letter or other proof the business is active, as the program requires
- Personal and business bank statements (all pages)
- Records for any business debt you pay personally, or that the business pays for you
Common mistakes self-employed borrowers make
- Filing returns first, asking about the mortgage second. Once returns are filed, the income on them is what it is.
- Running personal expenses through the business account right before applying for a bank statement loan.
- Taking a big business draw for the down payment without proof that the business can afford it.
- Changing your business structure mid-process without talking first. Going from sole proprietor to S corporation, for example, changes how income is documented.
- Assuming Non-QM is the only option. Many self-employed borrowers qualify for a conventional loan once someone reads the returns carefully, including add-backs like depreciation.
Common questions about this topic
How many years of tax returns do I need if I'm self-employed?
For conventional loans, Fannie Mae generally expects two years of signed personal returns, plus business returns where required. One year may be OK in some cases, such as when the business has existed for five years and you've owned at least 25% of it for five years in a row.
Can I get a mortgage with less than two years self-employed?
Sometimes. Fannie Mae allows less than two years when your latest signed returns show at least 12 months of income from the current business, and you earned similar or more income before in the same field or a similar role.
Do write-offs hurt my chances of getting a mortgage?
They can. For tax-return loans, lenders qualify you on taxable income. Some non-cash deductions, like depreciation, are added back. Talk with your CPA about the trade-off before you file.
What is Form 1084?
It's Fannie Mae's Cash Flow Analysis form. Lenders use it, or something like it, to turn the income on your tax returns into qualifying income. It starts from taxable income and adjusts for items like depreciation.
Are bank statement loans more expensive?
Generally, yes. They're Non-QM loans with their own pricing, and they usually require more equity than conventional loans. They can still be the right tool when your tax returns show less than you really earn.
Can I use business funds for my down payment?
Often, yes. When you qualify with self-employment income, the lender must confirm that using the money won't hurt the business. That may require business bank statements or a balance sheet.
This information is general education and may not reflect every lender's or investor's guidelines. Guidelines change; verify current requirements for your situation. Subject to credit approval, underwriting, program guidelines and property eligibility. Not a commitment to lend.