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When I began working with self-employed borrowers in the Dallas-Fort Worth area, I quickly learned something that changed how I handle every application. The usual mortgage rules don't work for business owners, contractors, and entrepreneurs. Your income story is more complicated, but that's not a bad thing; it just means you need to take a different approach.
The 2025 Homeownership Survey from IPX1031 says that 51% of Americans plan to buy homes in 2025. More and more of these buyers are self-employed. As of the fourth quarter of 2023, the U.S. Bureau of Labor Statistics said that 9.1 million unincorporated self-employed workers made up 5.7% of all nonagricultural workers. There are millions of business owners, freelancers, and contractors who are going through the same things you are right now.
This is what most self-employed people who borrow money don't know. Your tax returns show less income because you know how to take deductions. You bought that truck for your business to do landscaping? A real write-off. The home office where you meet with clients? A completely valid cost. But when you apply for a mortgage, the same deductions that help you save money on taxes can hurt you when you have to prove your income.
Who else? When else? That's how I deal with clients who work for themselves. You've worked hard to build something, and owning a home should be possible. Let me show you step by step how to do that.
If you own 25% or more of a business, get paid through 1099 forms instead of W-2s, or report your income on Schedule C of your personal tax returns, lenders will consider you self-employed. This definition includes:
Control and risk are the most important differences. When you work for yourself, you are responsible for making money and taking on the financial risk. Your income changes depending on the state of the market, how many clients you get, and how well your business does. These are all things that make lenders more cautious.
Knowing how underwriters think will help you make better documents. When underwriters look at self-employed income, they look at three main things: how stable and consistent the income is.
Underwriters figure out your qualifying income by taking the average of your net business income over the past two years. Here is an example with real numbers:
Year 1 Net Income: $85,000
Year 2 Net Income: $92,000
Average Annual Income: ($85,000 + $92,000) ÷ 2 = $88,500
Monthly Qualifying Income: $88,500 ÷ 12 = $7,375
If your income shows an upward trend, some lenders may weight the more recent year more heavily. However, if your income declined year-over-year, be prepared to explain the circumstances. Seasonal businesses need to demonstrate consistent patterns across multiple years.
According to the Mortgage Bankers Association's Q2 2025 Performance Report, independent mortgage banks reported a pre-tax net production profit of $950 per loan in Q2 2025, compared to a net loss in Q1 2025, indicating improved lending conditions.
Lenders examine whether your business generates sufficient cash flow to support both business operations and your mortgage payment.
Profit and loss statements: Monthly or quarterly P&L statements show revenue trends, expense patterns, and net profit margins. Lenders want to see healthy margins that can weather economic downturns.
Business bank account activity: Account balances and transaction history reveal operational health. Consistent deposits, manageable expenses, and adequate reserves demonstrate stability.
Outstanding business debts: Business loans, lines of credit, and outstanding payables affect your overall financial picture. High business debt relative to income can limit qualifying power.
Industry and market conditions: Lenders consider whether your industry is stable, growing, or contracting. A thriving business in a declining sector raises concerns about future income sustainability.
Beyond business metrics, your personal financial health matters significantly. Let’s take a look.
Credit profile: Self-employed borrowers typically need higher credit scores than W-2 employees. While conventional loans start around 620, many lenders prefer 680+ for self-employed applicants. FHA loans may accept scores as low as 580, but self-employed borrowers rarely qualify at minimum thresholds.
Debt-to-income ratio: Your DTI compares total monthly debt payments to gross monthly income. Most conventional loans cap DTI at 43-50%, while FHA loans may allow up to 50-57% with compensating factors. Calculate your DTI:
Total Monthly Debts: $2,100 (mortgage $1,400 + car $350 + student loans $250 + credit cards $100)
Gross Monthly Income: $7,375
DTI Ratio: ($2,100 ÷ $7,375) × 100 = 28.5%
Cash reserves: Lenders want to see savings beyond your down payment and closing costs. Reserves covering 6-12 months of mortgage payments provide a cushion against income disruptions. For a $2,000 monthly payment, you'd need $12,000-$24,000 in accessible savings.
Asset diversification: Multiple income streams, investment accounts, and liquid assets strengthen your application by demonstrating financial sophistication and backup resources.
You've got two main routes to mortgage approval, and choosing the right one depends on how your income appears on paper versus how it flows through your accounts.
Bank statement loans revolutionized self-employed lending by focusing on actual money movement rather than tax-reported income. At AmeriSave, we've seen these loans transform outcomes for business owners who write off substantial expenses.
How bank statement loans work: Instead of tax returns, lenders analyze 12-24 months of business or personal bank statements to calculate income. They apply an expense factor—typically 20-80% depending on your business type and employee count—to account for operating costs not visible in deposits.
Here's a real-world scenario. You're a contractor with $180,000 in annual deposits to your business account, but after legitimate deductions, your tax returns show only $65,000 in net income. A bank statement loan applies a 40% expense factor:
Annual Deposits: $180,000
Expense Factor: 40%
Qualifying Income: $180,000 × (1 - 0.40) = $108,000 annually
Monthly Qualifying Income: $108,000 ÷ 12 = $9,000
Compare that to the $5,417 monthly income ($65,000 ÷ 12) shown on tax returns. That $3,583 difference in qualifying income means approximately $80,000 more in purchasing power.
Ownership requirements matter: For personal bank statements, you need at least 25% business ownership. For business account statements, you must own 50% or more. If you commingle funds using personal accounts for business purposes, those accounts are treated as business accounts requiring 50% ownership.
Qualification standards at AmeriSave (rates and terms current as of October 2025):
When bank statement loans make sense: You're profitable but show low taxable income due to depreciation, business deductions, or legitimate write-offs. Your deposits are consistent but your tax returns don't reflect true earning power. You've been in business for 2+ years with stable or growing revenue.
Traditional loans from Fannie Mae, Freddie Mac, FHA, and VA remain accessible to self-employed borrowers who can document income through tax returns. These programs offer advantages that bank statement loans can't match.
Required documentation for traditional loans:
FHA loans for self-employed borrowers: Backed by the Federal Housing Administration, FHA loans offer the most lenient qualification standards. According to the Mortgage Bankers Association's weekly survey for the week ending January 17, 2025, FHA loans represented 16.5% of total applications.
VA loans for self-employed veterans: If you're a veteran, active-duty service member, or eligible spouse, VA loans provide unmatched benefits. The Department of Veterans Affairs guarantees these loans, making them attractive to lenders despite self-employment.
Conventional loans for self-employed borrowers: Fannie Mae and Freddie Mac loans offer competitive rates and terms for qualified self-employed applicants.
Key advantage of traditional loans: Lower interest rates, lower down payment requirements, and better long-term costs compared to bank statement loans. If your tax returns adequately reflect your income, traditional loans almost always provide better terms.
Getting your paperwork organized before applying speeds up the process and prevents delays during underwriting. Here's exactly what you need.
Unlike W-2 employees who can verify employment with a phone call, you're responsible for proving your business exists and operates legitimately.
Business license: Current license showing your legal authority to operate
Income and Asset Documentation
Gather complete financial documentation covering the required time periods.
Let me share what actually works when helping self-employed clients improve their approval odds. These aren't generic tips—these are strategies that have helped real borrowers in real situations get better terms.
Your DTI determines how much house you can afford, so lowering it before applying expands your options. Focus on impact, not just interest rates.
Credit Card A: $5,000 balance, $150 minimum payment = 3% payment ratio
Auto Loan: $18,000 balance, $425 monthly payment = 2.4% payment ratio
Student Loan: $32,000 balance, $280 monthly payment = 0.9% payment ratio
Paying off Credit Card A saves you $150 monthly for only $5,000—that's a 3% immediate return. Paying off the student loan saves $280 but costs $32,000—less than 1% return.
If you're buying in the next 3-6 months, eliminate high-payment-ratio debts first. If you've got 12+ months, consider paying off high-interest debts to improve cash flow and save money long-term.
Self-employed borrowers need stronger credit than W-2 employees. Here's how to maximize your scores.
Keep credit utilization below 30%: If you have $20,000 in total credit limits, keep balances under $6,000 across all cards. Individual card utilization matters too—even if your overall utilization is low, maxing out one card hurts your score.
Strategic balance timing: Credit bureaus report your balance on your statement closing date, not your payment due date. If you have a $5,000 limit and charge $4,000 monthly but pay it off, your utilization still shows 80% if the balance reports before you pay. Pay down balances before your statement closes to show lower utilization.
Don't open new credit accounts within 6 months of applying: Each new account triggers a hard inquiry and lowers your average account age. Both factors reduce your score. If you need to make large purchases, use existing accounts or wait until after closing.
Dispute errors immediately: According to the Federal Trade Commission, credit report errors are common. Review reports from all three bureaus—Experian, Equifax, and TransUnion—and dispute any inaccuracies at least 90 days before applying.
Keep old accounts open: Closing accounts reduces your total available credit and shortens your credit history. Keep old cards active with small recurring charges paid automatically.
Commingling funds creates complications during underwriting. If you use your personal checking for business deposits and expenses, lenders must treat it as a business account, requiring 50% ownership instead of 25%. That could disqualify you from bank statement loans if you're a minority owner.
Open separate business checking and savings accounts: Use business accounts exclusively for business transactions—client payments, vendor bills, equipment purchases, and operating expenses. AmeriSave requires clear separation to process applications efficiently.
Pay yourself consistently: Establish a regular transfer schedule from your business account to personal accounts. Consistent "paychecks" to yourself demonstrate stable income and make verification simpler. Irregular distributions or large sporadic transfers raise questions.
Document large transfers: If you move significant sums between accounts, keep records explaining the purpose. Year-end profit distributions, equipment sale proceeds, or investment changes should be documented with supporting paperwork.
Avoid cash transactions: Cash deposits and withdrawals create verification challenges. Use checks, wire transfers, or electronic payments for all significant transactions. If you must accept cash from customers, deposit it immediately and maintain detailed records.
Don't assume one loan type is best without running the numbers. I've seen clients convinced they needed bank statement loans when traditional FHA or conventional loans offered better terms.
In this scenario, if you qualify for conventional financing based on tax returns, you save $19,250 on down payment compared to the bank statement loan while maintaining similar monthly costs. But if your tax returns don't show sufficient income, the bank statement loan opens doors that would otherwise stay closed.
Bigger down payments reduce lender risk, improve your rate, and lower monthly payments—a triple benefit that's especially valuable for self-employed borrowers.
10% down: 6.875% rate on $360,000 loan = $2,370 monthly payment
20% down: 6.500% rate on $320,000 loan = $2,023 monthly payment
That's $347 monthly savings and $124,920 over 30 years, plus you avoid PMI altogether.
Down payment assistance programs: Many state and local housing finance agencies offer down payment assistance specifically for first-time buyers or income-qualified purchasers. These programs provide grants or forgivable loans to reduce your upfront costs. Check with your state housing finance agency to explore available programs.
Verify assistance acceptance: Not all lenders accept down payment assistance from all sources. At AmeriSave, we work with many assistance programs, but confirm acceptance before counting on these funds.
Adding another borrower strengthens your application by including their income and credit history. This is especially helpful if you show lower income due to business deductions.
Co-borrower vs. co-signer distinction: Though the terms are often used interchangeably in mortgage lending, a co-borrower takes equal ownership and responsibility for the loan. They're on the title and share ownership rights. Their income, credit, assets, and debts are all considered in qualification.
Important things to think about: The credit scores, DTI ratios, and financial profiles of both borrowers are looked at. If your co-borrower has bad credit or a lot of debt, they might not be able to help you. Co-borrowing also means that both people are responsible for the loan. If one of them defaults, it will hurt both of their credit scores.
Non-occupant co-borrowers: Some programs let parents or other family members co-sign without living in the house. These people don't live in the house, but their income and credit make the application stronger. There are different rules for each loan program.
Lenders are more likely to trust that your income will stay steady if your business metrics are strong.
Increase your net income percentage: If you can, cut back on extra costs in the months leading up to your application. This doesn't mean cutting important business costs; it means getting rid of extra costs. Better business management is shown by higher profit margins.
Pay off lines of credit, equipment loans, and other business debts to lower your business debt. Having less debt as a business makes your overall financial picture better and makes you eligible for more loan programs.
Don't rely too much on one or two big clients; this makes your income less stable. Showing that you have more than one way to make money and a lot of clients lowers the risk that people think you have.
Keep your quarterly results steady; try to avoid big changes in income if you can. Having steady results every quarter of the year is better than having strong results in the first two quarters and weak results in the last two.
If your income changed a lot from year to year, write down an explanation of the change. Lenders know that business income can change, but they need to know more about the situation to decide if the changes are normal or worrying.
How to write down explanations: Write a short, clear letter that explains what happened. Include supporting documents like industry reports that show seasonal trends, contracts with new major clients, or medical records if health problems affected operations.
The best time to do something depends on the state of the market, your business cycle, and your finances.
Monitor interest rate trends: According to Bankrate's analysis, mortgage rates fell to their lowest level in a year in October 2025, with expectations of further Federal Reserve rate cuts. When rates go down, refinancing becomes appealing to current homeowners, which makes lenders compete for their business.
Apply after good business quarters: If your business is seasonal, apply after your busiest time of year when you have the most money coming in and the most money in the bank. Tax preparers like to get applications in the spring, while landscapers like to get them in the fall.
Think about when you file your taxes: if you just filed returns that show your income has grown a lot, that's the best time. If this year's returns will be lower, it might be worth it to wait until next year when you can show that things are getting better.
First, build up your savings. Don't apply until you have enough savings beyond your down payment. Most lenders want self-employed borrowers to have enough money to cover 2 to 6 months' worth of mortgage payments.
Prequalification is a rough estimate based on the information you give. Preapproval means checking the documents and having an underwriter look at them. This difference is very important for borrowers who work for themselves.
At AmeriSave, we tell self-employed buyers to get fully preapproved before they start looking for a house. Putting in the time up front saves a lot of trouble during contract negotiations.
Not all lenders know as much about lending to self-employed people. Some people don't like complicated things, but others have special programs and experienced underwriters.
AmeriSave is a lender that specializes in loans for self-employed people. They have both bank statement and traditional loan programs. Because we know how hard it can be for business owners to get qualified, we've helped thousands of them through the process.
If you make money outside of your main business, keep good records of it. Having more than one source of income can make the difference between getting approved and being turned down.
Rental property income: If you've owned the properties for at least two years, you can include Schedule E income from investment properties. Lenders usually use 75% of gross rental income to cover maintenance and empty units.
Investment income: You can count dividends, interest, and capital gains from investment accounts if you can show that you have been receiving them consistently for two years and are likely to continue receiving them.
If you're married but only your name is on the business, your spouse's W-2 income can help you qualify for self-employment income.
VA disability or Social Security income: Lenders give these sources a lot of weight because they are very stable. They're great ways to make extra money for your business.
How AmeriSave Helps People Who Work for Themselves Get Loans
We know that your situation is different, so we've set up special ways to lend to self-employed people at AmeriSave. You are not just another application number; you are a business owner who has built something from scratch, and that deserves respect and expertise.
Our bank statement loan program makes it easy for business owners to qualify even if their tax returns don't show how much money they really make. We look at 12 months of bank statements to figure out your income and then use the right expense factors for your type of business. We can help borrowers in most of the country because we are licensed to lend in 37 states.
Self-employed borrowers can still use our traditional loan programs through FHA, VA, and conventional channels as long as their tax returns show enough income. We don't try to get you to buy one product; instead, we try to find the best program for your needs.
Our digital mortgage platform makes it easier to submit paperwork and process applications. You can safely upload your tax returns, bank statements, and business documents through our portal. You can see how your application is doing in real time and talk to your loan officer directly.
Our loan officers are experts at verifying income for self-employed people. They can look at your situation, explain how different ways of documenting it affect your eligibility, and suggest the best way to go about it.
We save Americans money, which is why we call it AmeriSave. That isn't just a slogan; it's the reason we started. No matter if you're a contractor in Texas, a freelance designer in Colorado, or a restaurant owner in Florida, we're here to help you buy a home.
The Current State Of The Market And What It Means For You
When you know more about the mortgage market as a whole, you can make better choices about when to buy and what to expect.
The MBA's weekly applications survey showed that mortgage applications went up 0.1% for the week ending January 17, 2025. Mortgage rates stayed close to 7%. This level of interest rates is still slowing down both purchases and refinances.
The Federal Housing Finance Agency's House Price Index said that home prices went up 2.3% from July 2024 to July 2025. This is a big drop from the peaks of 2021, when some areas saw annual growth of 20% or more. The MBA says that home prices will rise by 1.0% by the end of 2025, but they could drop by 0.3% in 2026.
For buyers who work for themselves, this means:
Slower price growth makes homes more affordable: After years of rapid price increases, homes are now easier to buy. You don't have to compete with annual growth of more than 10%.
The number of homes on the market is slowly rising. This means that buyers have more options and there are fewer situations where multiple offers are made, which is bad for self-employed buyers who need more time to gather paperwork.
The rate environment is still tough: Rates close to 7% are much higher than the 3–4% range from 2020 to 2021, which means higher monthly payments. A $350,000 loan at 7% costs $2,329 a month, while one at 3% costs $1,520 a month. That's a $809 difference.
Don't expect lending standards to get much easier; they are still strict. To protect against the risk of default, the requirements for documentation, minimum credit scores, and income verification are still very strict.
The Bottom Line on Mortgages for Self-Employed People in 2025
If you're self-employed and want to get a mortgage, you'll need more paperwork, be in a better financial position, and wait longer for the process to be finished. But none of those problems are too big to handle.
You can buy a home with either a bank statement loan that looks at your cash flow or a traditional mortgage that checks your income through your tax returns. The most important thing is to know which path is best for you, make sure all of your paperwork is in order, and work with lenders who specialize in lending to self-employed people.
Get your financial records in order first. This includes two years of tax returns, 12 to 24 months of bank statements, business verification documents, and asset statements. Find your DTI ratio and look for ways to make it better. Check your credit reports and fight any mistakes. If you haven't already, make sure your business and personal accounts are separate.
Then get preapproved before you start looking for a house. Find a lender who has experience with self-employed lending and can help you understand the specific requirements and make the best application possible.
You can still buy a home even if you work for yourself. You just need to go about the process in a different way. You can get through this successfully and get the home you want for you and your family if you plan ahead and find the right lender.
Are you ready to look into your choices? To find out what you can get based on your own self-employment situation, start your application with AmeriSave. Our loan officers are experts at lending to self-employed people and can help you understand the paperwork and the steps you need to take to qualify.
Most lenders want self-employed borrowers to give them two years' worth of full tax returns, including all schedules. This includes your personal 1040 forms and any business forms, like Schedule C for sole proprietors, Form 1065 for partnerships, or Form 1120S for S-corporations. The two-year requirement lets lenders look at how income has changed and stayed the same over time. There are some exceptions, though, if you've been self-employed for less than two years. If you can prove that you've worked in the same field or industry for at least two years, even if you were a W-2 employee during those years, you might be able to qualify with just one year of self-employment. You will need W-2s from your last job and proof of your current year's self-employment. When you're new to self-employment, some lenders will also accept formal education or professional certifications as proof of your skills. Keep full, signed copies of all tax returns that you sent to the IRS. Lenders will ask for IRS transcripts to make sure that the returns you give them are the same as what you filed. Your application will be delayed or stopped if there are any differences between the returns you sent and the IRS transcripts. Keep both digital and physical copies on hand in case you need to show them more than once during the process.
Lenders use your net business income after business expenses to figure out your qualifying income, not your gross receipts. This is true for self-employed borrowers. This is very different from W-2 employees, whose gross income before taxes is used to see if they qualify. Your net income shows up on different tax forms based on how your business is set up. Sole proprietors report it on Schedule C line 31, partnerships show it on Form 1065 and K-1s, and S-corporations report it on Form 1120S. Lenders then make some changes to that net income figure. They might add back non-cash costs like depreciation and depletion because these paper deductions lower taxable income without changing cash flow. But they also take away income that doesn't happen again, like one-time business sales or strange settlements. The goal is to find income that will last over time and be able to be relied on. This adjusted net business income is basically your "gross income" for qualification purposes because it shows how much money you made from the business before taxes. For self-employed people, it's less important to know the difference between gross and net than to know which expenses lenders add back and which ones they don't. Working with a loan officer who knows how to lend to self-employed people can help make sure that your income is calculated correctly so that you can qualify for the most money.
Yes, for sure. If you are a sole proprietor, partner, LLC member, or corporation shareholder, business income is a valid source of income for a mortgage. The way to check depends on the loan program you choose. Tax returns, including your personal 1040 and business returns with all the relevant schedules showing your share of business profit, are used to verify business income for traditional mortgages. Lenders take an average over two years, which smooths out income that changes. You would qualify if Year 1 showed $75,000 and Year 2 showed $95,000. This means you would need to make $85,000 a year, or about $7,083 a month. Bank statement loans check business income in a different way. They look at 12 to 24 months of bank deposits from either your business accounts or personal accounts where business income is deposited. They use an expense factor that usually falls between 20% and 80% to cover operating costs. The rest of the percentage is then used as qualifying income. Business owners who take a lot of legal deductions often end up with a higher qualifying income because of this. Showing that your business income is steady and likely to stay that way is the most important thing for all programs. Lenders want to see income trends that are steady or rising, not ones that are falling or changing all the time. If you run a seasonal business, be ready to show underwriters how your business has changed over the years so they know it's normal for your industry and not a red flag. Yes, business income definitely counts. You just need the right paperwork and a reasonable amount of stability.
Self-employed borrowers usually need a higher credit score than W-2 employees, but the minimum scores depend on the loan program and lender. The official minimum for conventional loans is about 620, but self-employed borrowers rarely meet that requirement. Most lenders want to see a credit score of 680 or higher for self-employed applicants. A score of 700 or higher gets the best rates and terms. FHA loans technically accept credit scores as low as 500 (with 10% down) or 580 (with 3.5% down), but self-employed borrowers have to meet higher standards. Most FHA lenders want self-employed applicants to have at least 600 to 620 because it's too risky to verify their income and have bad credit at the same time. The VA doesn't set a minimum credit score for VA loans, but most lenders do set overlays between 580 and 620. Depending on the lender, the down payment, and the loan amount, bank statement loan programs usually require a minimum credit score of 660 to 760. Self-employed borrowers need a higher credit score because their income documentation is more complicated and may not be as stable as that of people who work for someone else. To make up for the uncertainty in the paperwork, lenders require stronger credit histories. If your credit score is close to the line, work on raising it before you apply. Pay off your credit card balances to lower your utilization, dispute any mistakes on your credit reports, don't open any new accounts, and make all of your payments on time for at least 12 months before you apply. A score increase of 20 to 30 points can have a big impact on your chances of getting approved and the interest rate you get.
The amount of money you need to put down on a loan depends on the type of loan you get. Some programs don't require any money down, while others need 10% to 25% or more. If your credit score is 580 or higher, you only need to put down 3.5% for an FHA loan. This makes them a good choice for self-employed borrowers who don't have a lot of savings. That's $10,500 for the house and about $6,000 to $9,000 for closing costs, so you would need between $16,500 and $19,500 total. Veterans and service members who qualify for VA loans don't have to put any money down, but they will have to pay a funding fee of 1.4% to 3.6%, which can be added to the loan. Most self-employed borrowers need at least 5–10% down to make up for the extra paperwork that comes with conventional loans. Depending on your credit score, the amount of the loan, and the type of property, bank statement loans usually require a down payment of 10% to 40%. If you have a lower credit score and a bigger loan, you will need to put down more money. You need more than just the down payment; you also need savings to cover your mortgage payments if your income goes down. In addition to the down payment and closing costs, many lenders want self-employed borrowers to have 2 to 6 months' worth of mortgage payments set aside. That means you can save $4,000 to $12,000 on top of your down payment if you make a $2,000 monthly payment. If you want to buy something for $300,000, you might need $48,000 in cash. This includes a $30,000 down payment (10%), $8,000 in closing costs, and $10,000 in reserves. If that sounds hard, check out down payment help programs offered by your state's housing finance agency, look into FHA's lower requirements, or save up for another 6 to 12 months before applying. Having enough savings not only helps you qualify, but it also protects you from changes in business income after you buy.
Yes, you might be able to get a mortgage even if you've only been self-employed for less than two years. However, you will need to meet certain extra requirements that show your income is stable and you have experience in the industry. The most common way is to show that you have been in business for at least 12 months in a row and have worked in the same field for two years before that. For instance, if you worked as an electrician for five years before starting your own electrical contracting business 18 months ago, you would probably qualify because you have a lot of experience in the field even though your business is new. Lenders want to know that your self-employment is a continuation of skills you already have, not a new job with unknown prospects. To prove that connection, you'll need to show your W-2s, which show your work history; your business license or formation documents, which show when you started; and your tax returns and bank statements, which show how your business is doing now. Professional certifications and educational credentials can also show that you are dedicated and knowledgeable. Include proof of any degrees or professional licenses you have that are relevant to your business. For example, a CPA who just opened their own accounting business can use their professional license and education to help them even if they don't have a lot of experience running a business. Bank statement loans are not exempt from the two-year requirement. They need two years of business operation verified by business licenses, tax preparer letters, or Secretary of State filings. For the first two years of being self-employed, you would have to qualify for traditional mortgages by showing your tax returns. If your situation calls for it, bank statement loan options become available after you reach that two-year mark.
Bank statement loans and regular mortgages are two very different ways to check the income of self-employed borrowers. Each has its own pros and cons. Tax returns, specifically your net business income after all expenses and deductions, are used by FHA, VA, Fannie Mae, and Freddie Mac to check your income for traditional mortgages. If you wrote off vehicle expenses, home office deductions, equipment depreciation, and other legitimate business costs on your tax returns and said you made $80,000 in net income, that $80,000 is your qualifying income even if your business only made a small amount of cash. Instead of looking at your bank statements, bank statement loans look at your actual bank deposits over the past 12 to 24 months to figure out your income. If you had $150,000 in deposits in your accounts but only $80,000 in tax returns after deductions, the bank statement loan would be based on the $150,000 minus an expense factor of 20–80%, depending on your business. Business owners who take big deductions often end up with a lot more qualifying income as a result. The downside is that bank statement loans usually have higher down payments, higher interest rates, higher credit score requirements, and higher fees than regular mortgages. They're special items that are made for times when regular verification doesn't work. If your tax returns show your income accurately and let you qualify for the home you want, traditional mortgages almost always offer better terms, such as lower interest rates, smaller down payments, lower fees, and lower long-term costs. If your tax returns don't show how much money you really make enough to get the home you need through regular means, bank statement loans make sense. They're not the best choice for every self-employed borrower; they're just tools to help you get around paperwork problems.
It's harder to figure out how much money you make as a partner or S-corporation than it is as a sole proprietor because the way the business is set up and how profits are shared affect how much money you make. Lenders look at your K-1 form, which shows how much of the partnership's income or loss you are responsible for. They also look at the partnership's Form 1065 to get a sense of how the business is doing as a whole. Your qualifying income is usually the average of your K-1 income over two years, but lenders may change it for things like depreciation, depletion, and other non-cash costs. If you made $65,000 in K-1 income in Year 1 and $72,000 in Year 2, your qualifying income would be $68,500 a year or $5,708 a month on average. S-corporations are similar, but they require Form 1120S corporate returns and your K-1 to show your share of corporate income. But owners of S corporations often pay themselves W-2 salaries on top of the K-1 distributions they get. Lenders will add both parts together. Your total income is $90,000 if you paid yourself a $50,000 W-2 salary and got $40,000 in K-1 distributions. Your W-2 salary from your own S-corporation counts fully because you work there (even though you own it), but your K-1 income is averaged and adjusted like any other income. When ownership shares are less than 50% or when businesses lose money, things get more complicated. If your K-1 says you lost money, lenders usually see that as zero income instead of negative income that makes your DTI go up. Some lenders won't count your income if you own less than 25% of a partnership or corporation because you don't have enough control over how the business runs. Always send in both your personal and business tax returns so that underwriters can look at both your personal income and the health of the business. Lenders want to know that the business that pays you K-1 income is making money and will continue to do so, not just that you got distributions.
You don't have to hire a CPA to do your taxes for mortgage qualification purposes, but it's a good idea for self-employed borrowers to work with a qualified tax professional. A lot of lenders want letters from tax preparers or CPAs that confirm how long your business has been open, how much of it you own, and how much money you make. These letters can be written by enrolled agents, CPAs, or certified tax preparers. However, CPAs are usually more trusted by underwriters because they have more credentials and a wider range of knowledge. If your business is simple, like a sole proprietorship with simple income and expenses, an enrolled agent or certified tax preparer may be all you need. But if you run a partnership or S-corporation, have a lot of complicated deductions, own more than one property, or have other things that make your taxes more complicated, a CPA's knowledge becomes more useful. They can help you file your taxes in a way that maximizes legal deductions while still reporting enough income to qualify for a mortgage. This balance is very important because aggressive deduction strategies that lower tax liability can also lower qualifying income for mortgages at the same time. A CPA who knows a lot about mortgage underwriting can help you find that balance. Also, if problems come up during underwriting, like questions about certain deductions, requests for more information about business expenses, or worries about how income is calculated, having a CPA who can explain things in detail to the underwriters can make the difference between getting approved and getting turned down. The benefits of having a mortgage are often enough to make the cost of hiring a CPA worth it, which is usually a few hundred to a few thousand dollars a year, depending on how complicated the work is. If you're currently using software to do your own taxes or working with a less qualified preparer, you should think about hiring a CPA at least two years before you plan to apply for a mortgage. That gives you official proof of your income during the time that lenders will look at the most.
Yes, seasonal businesses can definitely get mortgages. However, you need to make it clear to underwriters that your income pattern is seasonal so they know it's normal for your industry and not a sign of instability. To find out how a seasonal business works, lenders look at its history over several years. If you run a landscaping business that makes 80% of its money between April and October and only a little bit of money in the winter, that's fine as long as you can show that same pattern happening for at least two years. The most important thing is to show that the seasonal cycle is stable. Write down an explanation of how your business changes with the seasons for underwriters. Tell us which months are the busiest and which are the slowest, and why. Include information about the industry. For example, landscaping, tax preparation, holiday retail, tourism, construction in cold climates, and many other businesses have seasonal patterns that underwriters should know about. To get rid of the seasonal changes, some lenders will average your income over a year. If you're applying during peak season when income and account balances are highest, some people may give more weight to recent months. It helps to time your application well. If you can, apply right after your busiest season when you have the most money and the best income history. Your bank statements will show that you made a lot of deposits, and your accounts will have built up reserves from your busy months. Don't apply when your accounts are low and your income is low, like during your slow season. Also, keep enough money in reserve to cover your mortgage payments during slow months. You need to save money to help your personal cash flow if your business makes $120,000 from April to October but only $20,000 from November to March. Lenders want to know that you've been able to do this well in the past and have the money to keep doing it. Seasonal businesses shouldn't stop you from getting a mortgage; they just need more detailed proof of the seasonal pattern and a little more financial savvy when it comes to managing cash flow.
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