How Do I Qualify for a Mortgage If I Am Self-Employed?

You qualify on the same tests as an employee (credit, down payment, and debt-to-income ratio), but the lender figures your income from your tax returns instead of pay stubs. Fannie Mae and FHA generally want two years of self-employment history and two years of personal tax returns, plus business returns if your business files its own. Your qualifying income is your net business income after deductions, usually averaged over two years, with noncash write-offs such as depreciation added back. Large write-offs that lower your taxes also lower the amount you can borrow.

Both Fannie Mae and FHA treat you as self-employed if you own 25% or more of a business. If you own less, employee payroll records support wages, but business income reported on Schedule K-1 needs separate documentation. For that K-1 income, Fannie Mae generally requires two years of personal tax returns and K-1s, plus proof of distributions at the income level used to qualify or enough business cash to pay it out.

What documents do self-employed borrowers need?

Instead of signed copies, the lender can get transcripts of your returns directly from the IRS with your permission on IRS Form 4506-C. If you plan to use business funds for the down payment, Fannie Mae also requires the lender to check that the withdrawal will not hurt the business, which can mean several months of business bank statements. Mortgage documentation lists the other paperwork every borrower needs.

Can you qualify with less than two years of self-employment?

Often, if you stayed in the same line of work:

• Fannie Mae: your most recent signed personal and business returns must show a full 12 months of income from the current business, and you must document earlier income at the same or a higher level in a business offering the same products or services or in a job with similar duties.
• FHA: with 1 to 2 years of self-employment, the income counts only if you worked in the same or a related occupation for at least 2 years before.

FHA's one-year minimum measures time in self-employment; Fannie Mae requires a full 12 months of income on the returns. Ask your lender which history and tax-return requirements you still need to meet.

How do lenders calculate self-employed income?

The starting point depends on how your business files taxes:

• Sole proprietor or single-member LLC (Schedule C): net profit, plus depreciation, depletion, amortization, business use of your home, and casualty losses. Home-office deductions can include cash expenses such as rent and utilities. One-time income is subtracted, and Fannie Mae also subtracts the nondeductible part of meal expenses.
• Partnership, multi-member LLC, or S corporation (Schedule K-1): your share of the business's ordinary income counts if your K-1s show a steady history of cash distributions at that level, or if the lender confirms the business has enough cash to pay it out. Guaranteed payments you have received for 2 years count, as do W-2 wages the business pays you.
• C corporation (Form 1120): your W-2 wages count. For Fannie Mae loans, the corporation's own earnings count only if you own 100% of it, its sales and earnings are stable and rising, and the lender confirms it has enough available cash to support your withdrawals without severely harming the business.

The lender then averages the years. FHA uses the lower of your two-year average and your most recent year, and if income fell more than 20% over the period, the loan must be underwritten by hand. Under FHA's standard manual rules, the lender must document an extenuating circumstance that caused the drop. You must show at least 12 months of stable or increasing income afterward and qualify using the reduced income. Fannie Mae requires the lender to analyze year-to-year trends in your gross income, expenses, and taxable income, so a falling trend can reduce or rule out the income.

Example (Schedule C):

The two-year average is $84,500, or $7,041.67 a month. Because 2025 is higher than the average, FHA would also use $84,500. If 2025 qualifying income had instead fallen to $72,000, the average would be $76,500, and FHA would use the lower $72,000, or $6,000 a month.

How write-offs change the result. Suppose you had deducted another $10,000 a year in cash expenses, such as equipment rental. Qualifying income drops by $10,000 a year, or $833 a month. At a 45% debt-to-income limit, that cuts the monthly debt payments you can qualify for by about $375 ($833 x 45%). Depreciation does not have this effect because the lender adds it back. If you plan to buy within two years, ask a tax preparer and a loan officer to compare your tax savings with the borrowing power you give up. How debt-to-income ratio works shows how that monthly income turns into a loan amount.

What do bank statement loans offer, and what do they cost?

A bank statement loan qualifies you on eligible deposits in your personal or business bank statements instead of your tax returns. The lender excludes transfers and other non-income deposits and adjusts business deposits for expenses, which can substantially reduce qualifying income. It is a non-qualified mortgage (non-QM), a loan made outside both the federal Qualified Mortgage standards and the rules of Fannie Mae, Freddie Mac, FHA, VA, and USDA, so the lender keeps it or sells it to private investors.

• What it offers: federal ability-to-repay rules still require the lender to verify your income with reliable third-party records, and bank records are one of the records the rules list. That lets a lender approve you when write-offs make your taxable income too low.
• What it costs: each lender sets its own income method, rate, fees, and minimum down payment. When the CFPB rewrote the Qualified Mortgage rule, it noted that non-QM loans may cost borrowers materially more. Federal rules do bar a prepayment penalty on a non-QM loan for a home you live in, so you can refinance later without one if your tax returns come to support a conventional or FHA loan.

Before you choose one, get a Loan Estimate for the bank statement loan and another for a conventional or FHA loan based on your tax returns, then compare the annual percentage rate (APR) and the cash needed to close.

For general requirements, see how to qualify for a mortgage. Fannie Mae and Freddie Mac loan requirements covers credit score and down payment rules for conventional loans, and what a mortgage is explains the loan itself.