Self-Employed Mortgage Requirements: How to Qualify in 2025

Self-employed borrowers need 2 years of tax returns (personal and business), proof of 2+ years in business, stable or increasing income and standard credit/DTI requirements. Lenders calculate income by averaging net income from tax returns—not gross revenue. Write-offs that reduce taxable income also reduce qualifying income, making mortgages harder for self-employed borrowers who aggressively minimize taxes.

What Counts as Self-Employed?

Lenders consider you self-employed if you:

• Own 25%+ of a business
• Work as an independent contractor
• Receive 1099 income instead of W-2
• Are a freelancer or gig worker
• Own an LLC, S-Corp or sole proprietorship

Time requirement: Most lenders require 2 years of self-employment history in the same business or field.

Documentation Requirements

Tax Returns

Document	Requirement
Personal tax returns	2 years (all pages and schedules)
Business tax returns	2 years (if applicable)
IRS transcripts	Often required to verify returns

Which business returns?

• Sole proprietor: Schedule C (part of personal return)
• Partnership: Form 1065 + K-1
• S-Corp: Form 1120-S + K-1
• C-Corp: Form 1120

Additional Business Documentation

Document	Purpose
Business license	Proves legitimate business
CPA letter	Verifies business is active
Profit and loss statement	Shows YTD income
Bank statements	Verifies deposits match income
1099s received	Shows client payments

Year-to-Date Profit and Loss

Lenders want to see current business performance:

• Prepared by CPA or accountant
• Shows revenue, expenses, net income
• Covers current year through recent month
• Should be consistent with historical returns

How Lenders Calculate Self-Employed Income

The Basic Formula

Lenders use net income from tax returns, not gross revenue.

Calculation:

1. Add net income from both years
2. Divide by 24 months
3. Result is monthly qualifying income

Sole Proprietor Example (Schedule C)

Year	Gross Revenue	Expenses	Net Income (Line 31)
2023	$180,000	$85,000	$95,000
2024	$200,000	$90,000	$110,000

• Total net income: $205,000
• Divided by 24: $8,542/month qualifying income

S-Corp Owner Example

S-Corp owners have two income components:

Year	W-2 Salary	K-1 Distribution	Total
2023	$60,000	$45,000	$105,000
2024	$65,000	$55,000	$120,000

• Total: $225,000
• Monthly: $9,375/month qualifying income

Add-Backs

Certain non-cash expenses can be added back to income:

Common add-backs:

• Depreciation
• Depletion
• Amortization
• Some one-time expenses

Example with add-backs:

• Net income: $80,000
• Depreciation: $15,000
• Adjusted income: $95,000

The Tax Write-Off Problem

The dilemma: Write-offs reduce taxes but also reduce qualifying income.

Angela’s situation:

• Gross revenue: $250,000
• Aggressive write-offs: $170,000
• Net income: $80,000
• Monthly qualifying income: $3,333

She makes $250,000 but only qualifies based on $80,000. Her write-offs helped at tax time but hurt her mortgage qualification.

Declining Income Issues

If income is declining, lenders may:

• Use lower year only
• Average both years (less favorable)
• Decline the application

Example of declining income:

• 2023: $120,000
• 2024: $90,000
• Lender uses: $90,000 (lower year)

Why it matters: Declining income suggests the business may be struggling.

Credit and DTI Requirements

Credit Score

Same minimums as employed borrowers:

• Conventional: 620 (680+ for best rates)
• FHA: 580
• VA: No minimum (620+ typical)

Reality: Self-employed borrowers with marginal credit face extra scrutiny.

Debt-to-Income Ratio

Standard DTI limits apply:

• Front-end: 28-31%
• Back-end: 43-45%

Challenge: Lower qualifying income means lower maximum loan amount.

Reserves

Self-employed borrowers may need more reserves:

• 2-6 months typical
• Shows stability despite variable income
• Provides cushion for income fluctuations

Loan Options for Self-Employed

Conventional Loans

Best for: Self-employed borrowers with 2+ years history, stable income, good credit

Requirements:

• 2 years tax returns
• Stable or increasing income
• Standard credit/DTI requirements

FHA Loans

Best for: Self-employed borrowers with lower credit or smaller down payment

Requirements:

• 2 years tax returns
• 580+ credit score
• 3.5% down minimum

Bank Statement Loans

Best for: Self-employed borrowers with high write-offs

How it works:

• Use 12-24 months of bank statements instead of tax returns
• Income calculated from deposits
• Higher rates (1-2% above conventional)
• Larger down payment (10-20%+)

Example:

• Monthly bank deposits: $25,000 average
• Expense ratio applied: 50%
• Qualifying income: $12,500/month

Asset-Based Loans

Best for: High-net-worth self-employed with significant assets

How it works:

• Qualify based on liquid assets rather than income
• Assets divided by loan term to calculate “income”
• Higher rates and larger down payments

1099 Income Loans

Best for: Independent contractors with 1099 income

How it works:

• Uses 1099s and bank statements
• May require 1-2 years of 1099 history
• Alternative documentation accepted

Tips for Self-Employed Borrowers

Plan Ahead (2 Years)

If you’re thinking about buying:

• Reduce aggressive write-offs
• Show higher net income on returns
• Build consistent income history

The trade-off: Pay more in taxes now to qualify for a larger loan later.

Keep Business and Personal Separate

• Separate bank accounts
• Clear records of income and expenses
• Clean paper trail for lenders

Work with Experienced Lenders

Not all lenders handle self-employed loans well. Find:

• Lenders experienced with self-employed
• Mortgage brokers who know alternative options
• Local lenders who understand your business type

Consider Your CPA’s Role

Your CPA can help:

• Prepare proper documentation
• Write verification letters
• Explain unusual items to lenders
• Balance tax savings with mortgage qualification

Document Everything

Keep organized records of:

• All tax returns
• Bank statements
• 1099s received
• Business licenses
• Contracts and invoices

Common Challenges and Solutions

Challenge: High Write-Offs, Low Qualifying Income

Solution:

• Reduce write-offs for 1-2 years before buying
• Use bank statement loan if write-offs are legitimate
• Consider larger down payment to offset smaller loan

Challenge: Business Less Than 2 Years Old

Solution:

• Wait until you have 2 years history
• Show prior experience in same field (as employee)
• Some lenders accept 1 year with strong compensating factors

Challenge: Declining Income

Solution:

• Explain temporary factors (one-time expense, client loss)
• Wait until income stabilizes
• Provide YTD P&L showing recovery

Challenge: Multiple Businesses or Complex Structure

Solution:

• Hire CPA to prepare clear documentation
• Provide organizational chart
• Expect longer underwriting timeline

Self-Employed Mortgage Checklist

Tax Documentation:

• 2 years personal tax returns (all pages)
• 2 years business tax returns (if applicable)
• K-1s for partnerships/S-Corps
• IRS transcripts (lender may order)

Business Documentation:

• Business license
• CPA letter verifying business is active
• Year-to-date profit and loss statement
• 2-3 months business bank statements

Standard Documentation:

• 2-3 months personal bank statements
• Government-issued ID
• Proof of assets/reserves

Frequently Asked Questions

Can I get a mortgage if I’m self-employed for 1 year?

Difficult with conventional loans (2 years typically required). Some lenders accept 1 year with prior experience in the same field. Bank statement loans may work with 12 months of statements.

Do self-employed pay higher mortgage rates?

Not necessarily for conventional/FHA/VA loans. Rates are based on credit and loan type, not employment type. Bank statement and non-QM loans do have higher rates (1-2% more).

How much income do I need as self-employed?

Enough qualifying income to keep DTI under 43-45%. Calculate: (Net income from returns ÷ 24) = monthly qualifying income. That determines your maximum loan amount.

What if my income varies year to year?

Lenders average 2 years for stable/increasing income. For declining income, they may use the lower year. Large variations require explanation.

Can I use bank statements instead of tax returns?

Yes, with bank statement loans. These are non-QM products with higher rates (7-9%+) and larger down payments (10-20%+). They’re useful when tax returns don’t reflect true income.

Should I file as an S-Corp or sole proprietor for mortgage purposes?

Consult a CPA. Generally, sole proprietors have simpler documentation. S-Corps may offer tax advantages but add complexity. The structure should serve your business, not just mortgage qualification.