Self-Employed Mortgage Options: How Lenders Look at Your Income

If you work for yourself, you already know the paradox. The same tax deductions that keep your bill down can make your income look smaller to a mortgage underwriter than it feels in your bank account. The good news is that self-employed mortgage options are real, and understanding how lenders think makes the process far less frustrating. Here's how lenders look at self-employed income, what to gather, and where a bank statement loan might fit.

A lender can't just take your word for what you earn, and it can't use a pay stub, because you don't have one. So the lender looks for a track record, and then tries to work out how much of what your business earns is really available to you.

Fannie Mae's Selling Guide, which sets the standards for many conventional loans, says lenders must obtain signed federal income tax returns, both individual and in some cases business returns, for the past two years, or IRS-issued transcripts of them. Two years is the common standard for conventional loans. There are limited exceptions: for example, if you have less than two years of self-employment, your income may still be considered if your most recent signed personal and business returns reflect a full year (12 months) of self-employment income from the current business. The guide also allows a single year of returns in some cases when the business has operated for five consecutive years with you holding at least 25% ownership. Because lenders can add their own requirements on top of Fannie Mae's, ask what yours will need.

How many years of self-employment do I need for a mortgage?

For conventional loans, Fannie Mae generally looks for two years of tax returns. There are limited exceptions, such as when you have a full year of self-employment income reflected on your latest returns. Other loan types and lenders may differ.

Do lenders use my gross income or my net income?

They start with your net profit on your tax return, then make adjustments such as adding back depreciation. They are trying to find the cash flow you can rely on, not the gross revenue.

Can I qualify if I write off a lot of expenses?

You may, but write-offs reduce the income a lender can count. Add-backs for items like depreciation can help, and bank statement loans calculate income a different way. We can compare the options once I see your documents.

Do bank statement loans require tax returns?

My bank statement loans page says tax returns aren't required for these loans, since income is calculated from bank deposits. They're Non-QM programs with their own requirements, such as a larger down payment and minimum credit scores, and terms vary by lender.

What is the first thing I should do?

Gather your last two years of returns and your most recent bank statements, then reach out so we can look at the numbers together.