Self-employed borrowers qualify using 2 years of tax returns. Lenders calculate income from your Schedule C (sole proprietor) or K-1 (partnership/LLC). Heavy business deductions reduce your qualifying income.
Work with a CPA 12-24 months before applying to balance tax savings with mortgage qualification. Most loan programs accept self-employment income.
How Lenders Calculate Self-Employed Income
Lenders look at your net income after deductions, not your gross revenue. If your business made $150,000 but you deducted $50,000 in expenses, your qualifying income is $100,000. The lender uses the average of the last 2 years of tax returns.
The 2-Year Requirement
Most lenders require 2 years of self-employment history. If you just started your business, you may need to wait until you have 2 years of tax returns. Exceptions exist for borrowers transitioning from W-2 to self-employment in the same field. For example, a nurse who started a home health agency would qualify easier than someone starting a completely new business.
The Write-Off Problem
This is the biggest challenge for self-employed borrowers. The more you write off in business expenses, the lower your net income appears on your tax return. But lenders use that net income to qualify you. A borrower who writes off $80,000 of a $150,000 income appears to earn only $70,000 for mortgage purposes.
Strategy: Work with your CPA to understand the mortgage implications of your deductions. You may choose to reduce certain deductions in the year before applying for a mortgage.
Documentation Needed
- 2 years of personal and business tax returns (all schedules)
- Year-to-date profit and loss statement
- Business license or proof of business existence
- Bank statements (business and personal)
- CPA letter or business verification (if needed)
Strategies to Qualify
- Plan ahead — Start working with a mortgage-aware CPA 12-24 months before applying
- Reduce deductions — Consider taking fewer deductions in the year before applying
- Increase income — Take on more clients or work to boost your gross revenue
- Bank statement loans — Some lenders offer loans based on bank statement deposits instead of tax returns
Best Loan Programs
Conventional and FHA work well for most self-employed borrowers. DSCR loans are ideal for real estate investors who are self-employed. Bank statement programs are available for borrowers who have strong cash flow but high deductions. Talk to a lender about which program fits your specific situation.
