Being self-employed doesn't prevent you from qualifying for a mortgage. Business owners, freelancers, independent contractors and other self-employed borrowers can qualify for many of the same mortgage programs available to W-2 employees. The difference is often how your income is documented and calculated.
For many self-employed borrowers, the biggest challenge isn't earning enough income — it's showing qualifying income in a way that meets the requirements of a particular mortgage program. Business deductions, fluctuating income, multiple income sources and the way a business is structured can all affect the calculation.
Depending on your financial situation, options may include conventional financing, FHA loans, bank statement programs and other alternative-documentation mortgages.
If you're self-employed and considering buying or refinancing a home in Maryland, Virginia, Washington, D.C., Delaware, North Carolina or Florida, understanding these differences before applying can help you determine which mortgage options may fit your situation.
How Can I Qualify for a Conventional Loan if I'm Self-Employed?
Yes, self-employed borrowers can qualify for conventional mortgages. Being self-employed does not automatically require you to use a bank statement or Non-QM loan.
The primary difference is income documentation. Rather than relying on W-2s and regular pay stubs, the lender may need to analyze tax returns and business documentation to determine whether the income being used to qualify is stable, sufficient and likely to continue.
Depending on the borrower's circumstances and applicable underwriting requirements, documentation may include personal and/or business tax returns, year-to-date financial information and other records related to the business.
One issue that often surprises self-employed borrowers is the effect of business deductions. Legitimate tax deductions can reduce taxable income, and the income shown on a tax return isn't necessarily the same as the gross revenue generated by the business. Mortgage qualifying income therefore needs to be calculated according to the requirements of the particular loan program.
This is one reason it's helpful to have your income reviewed before you begin shopping for a home. A mortgage professional can look at the documentation and help determine how much income may be usable for qualification and whether a conventional or alternative loan program deserves consideration.
Mortgage Options for Self-Employed Borrowers
| Your Situation | Mortgage Option to Explore |
| Tax returns document sufficient qualifying income | Conventional Loan |
| Want a government-backed option with flexible qualification features | FHA Loan |
| Tax returns don't fully reflect business cash flow | Bank Statement Loan |
| Alternative income documentation is needed | Non-QM Loan |
| Buying an investment property where rental cash flow supports qualification | DSCR Loan |
There isn't one “self-employed mortgage.” The right approach depends on how you earn income, how that income appears on your financial documents, the property you're financing and your overall borrower profile.
Bank Statement Loans for Self-Employed Borrowers
For some self-employed borrowers, tax returns may not provide the clearest picture of the cash flow generated by their business. This can happen when legitimate business deductions significantly reduce the taxable income reported on a tax return.
A bank statement loan is an alternative-documentation mortgage that may allow qualifying income to be evaluated using deposits shown on personal or business bank statements rather than relying solely on traditional tax-return income calculations.
Depending on the loan program and borrower circumstances, a lender may review a specified period of bank statements and, when business accounts are used, consider applicable business expenses when determining qualifying income.
Bank statement loans can be particularly useful for business owners, independent contractors, consultants and other self-employed borrowers whose cash flow may be stronger than the taxable income reflected on their returns.
However, bank statement loans are not automatically the better choice simply because someone is self-employed. If you can qualify using conventional income documentation, it is worth comparing that option with alternative-documentation financing before deciding which approach fits your situation.
How Do Business Tax Deductions Affect Mortgage Qualification?
Legitimate business deductions can reduce taxable income, which can sometimes create a disconnect between how well a business is performing and the income available for mortgage qualification.
For example, a business may generate substantial gross revenue while reporting considerably less taxable income after eligible expenses and deductions. For a mortgage program that relies on tax-return income, the lender generally cannot simply use the business's gross revenue as the borrower's qualifying income.
That does not necessarily mean the borrower cannot qualify for a mortgage. Depending on the circumstances, certain items may be treated differently under applicable underwriting guidelines, or an alternative-documentation program may provide another way to evaluate income.
This is why self-employed borrowers can benefit from having their financial documents reviewed before assuming they earn too little—or too much—to qualify for a particular mortgage.
FHA Loans for Self-Employed Borrowers
Self-employed borrowers may also be able to qualify for FHA financing. FHA loans can be worth considering for borrowers who may benefit from the program's down payment and credit features.
Being self-employed does not change the basic requirement to demonstrate sufficient, stable income. The lender will evaluate the borrower's self-employment income and supporting documentation under the applicable FHA guidelines.
For some borrowers, FHA financing may provide a useful alternative to conventional financing. However, the best option depends on the borrower's income, credit profile, available funds, property and overall financial situation.
What Documents May a Self-Employed Borrower Need?
The documentation required for a self-employed mortgage can vary based on the loan program, business structure and how the income is being used to qualify.
Depending on the circumstances, a lender may review items such as:
Personal federal income tax returns
Business tax returns
Schedule C, K-1 or other applicable tax schedules
Year-to-date profit and loss information
Business financial statements
Bank statements
Documentation verifying the existence and operation of the business
Conventional underwriting guidelines may require analysis of one or more years of tax-return information depending on the specific borrower and loan scenario. The goal is to determine whether the income used for qualification is stable, sufficient and reasonably expected to continue.
How Should Self-Employed Borrowers Prepare for a Mortgage?
Good preparation can make the mortgage review process much smoother.
Keep personal and business finances organized, maintain accurate records and be prepared to explain unusual or significant deposits when necessary. If you're planning to purchase a home in the near future, it can also be helpful to speak with your CPA and mortgage professional before making major changes to the way income or business expenses are reported.
Most importantly, don't assume that a large amount of business revenue automatically equals the same amount of mortgage qualifying income—or that significant tax deductions automatically prevent you from qualifying.
Having your financial documents reviewed early can help you understand how a lender may calculate your income and which mortgage programs may be worth considering.
Frequently Asked Questions About Mortgages for Self-Employed Borrowers
Can self-employed borrowers get a conventional mortgage?
Yes. Self-employed borrowers can qualify for conventional mortgages if they meet the applicable underwriting requirements. The primary difference is often how income is documented and calculated. Depending on the circumstances, the lender may review tax returns, business information and other financial documentation to determine stable qualifying income.
Do I need two years of self-employment to qualify for a mortgage?
Not necessarily. Two years of self-employment history is commonly used when evaluating self-employed income, but some conventional loan scenarios may allow a shorter history when specific requirements are met, including consideration of the borrower's previous employment or income history. Requirements vary by loan program and individual circumstances, so a shorter self-employment history should be reviewed rather than automatically assumed to be ineligible.
Can I get a mortgage without traditional pay stubs?
Yes. Self-employed borrowers often do not receive traditional W-2 pay stubs. Depending on the mortgage program, income may instead be documented through tax returns, business financial information, bank statements or other acceptable documentation. Alternative-documentation programs may also be available for borrowers whose income is not easily demonstrated through traditional methods.
How do business deductions affect mortgage qualification?
Business deductions can reduce the taxable income reported on a self-employed borrower's tax returns. Because many traditional mortgage programs use tax-return information when calculating qualifying income, significant deductions can sometimes reduce the income available for mortgage qualification. However, certain items may be treated differently under applicable underwriting guidelines, so the calculation should be reviewed carefully rather than based simply on the taxable income shown on the return.
What is a bank statement loan?
A bank statement loan is an alternative-documentation mortgage that may allow qualifying income to be evaluated using deposits shown on personal or business bank statements rather than relying solely on traditional tax-return income calculations. These programs can be useful for some self-employed borrowers whose business cash flow is not fully reflected by their taxable income. Program requirements vary.
Can independent contractors qualify for a mortgage?
Yes. Independent contractors can qualify for mortgages. Like other self-employed borrowers, they may need to provide documentation that allows the lender to evaluate the stability and amount of their qualifying income. Depending on the borrower's circumstances, conventional, FHA, bank statement and other mortgage programs may be worth exploring.
Which mortgage is best for a self-employed borrower?
There isn't one mortgage program that is best for every self-employed borrower. A conventional mortgage may work well when tax returns document sufficient qualifying income, while a bank statement or other alternative-documentation program may be worth exploring when traditional tax-return calculations don't accurately reflect the borrower's financial situation. FHA financing may also be appropriate for some borrowers, while real estate investors may want to explore DSCR financing.
The right choice depends on factors including income documentation, business structure, credit, assets, down payment, property type and the purpose of the loan. Comparing the available options before applying can help identify an appropriate financing strategy.
Talk With a Mortgage Professional About Your Self-Employed Income
Self-employed borrowers don't all fit into the same mortgage program. The way your business is structured, how your income is documented, your tax returns, assets, credit profile and the property you're financing can all influence which options may be available.
Redwood Mortgage Services works with business owners, independent contractors and other self-employed borrowers to evaluate conventional and alternative-documentation mortgage options.
If you're considering buying or refinancing a home, we can review your situation and help you understand the financing options that may be worth exploring.
Schedule a Consultation | Apply Online
All loans subject to approval. Equal Housing Lender.