Being self-employed doesn't mean getting a mortgage has to be difficult.
It does, however, mean that determining your qualifying income can be more complicated than it is for someone who receives the same salary every pay period.
I've been helping borrowers with mortgage financing since 1999, and one of the biggest misunderstandings I see among self-employed borrowers is assuming that the amount their business earns is automatically the income a mortgage lender will use.
It isn't always.
Depending on how your business is structured, mortgage underwriting may analyze tax returns, business income, expenses, ownership percentage, income trends and other financial information to determine the income that can be used for qualification.
My job is to help you understand that analysis before you commit to a home purchase or make assumptions about how much you can borrow.
— John Madden
Owner, Capital Funding Mortgage Associates
Mortgage Professional Since 1999 | NMLS #960139
For mortgage purposes, self-employment can include many different situations.
You may operate as a:
Simply receiving a W-2 doesn't necessarily mean your income will always be analyzed exactly like that of an employee with no ownership interest.
Your ownership interest, business structure, income history and applicable mortgage guidelines can all matter.
This is one of the most important concepts for a self-employed borrower to understand.
Suppose your business generates:
$500,000 per year in gross revenue.
That does not mean a mortgage lender considers you to have $500,000 of qualifying income.
The business has expenses.
Depending upon the business structure, underwriting may analyze information reported on your personal and/or business tax returns and make applicable adjustments when calculating qualifying income.
That's why I don't like giving a self-employed borrower a meaningful pre-approval based simply on:
“My business makes about $500,000 a year.”
I want to see how that income is actually documented.
Different types of self-employment can require different income analysis.
A sole proprietor commonly reports business income and expenses on Schedule C of the personal federal income-tax return.
Underwriting may begin with the reported net profit or loss and then evaluate applicable adjustments under the loan program's guidelines.
A partner may receive a Schedule K-1, and the business may file a partnership return.
Depending upon the circumstances, underwriting may need to evaluate the borrower's share of business income, distributions, ownership and the financial condition of the business.
An S-corporation owner may receive both:
W-2 wages
and
K-1 income.
Depending upon ownership and the income being used, additional business documentation may be required.
Income analysis for an owner of a C corporation can differ from an S corporation or sole proprietorship.
Again, the borrower's ownership percentage and the income being relied upon can affect the documentation and analysis required.
For many traditional mortgage programs, tax returns can be an important part of determining self-employed qualifying income.
An underwriter isn't simply looking at how much tax you paid.
The returns help establish things such as:
This is why two business owners with similar gross revenue can have very different mortgage qualifying income.
Business owners understandably want to take legitimate deductions and reduce taxable income.
But there can be a tradeoff.
A deduction that reduces taxable income can sometimes also reduce the income available for mortgage qualification.
That doesn't mean you shouldn't take legitimate business deductions.
It means you should understand that tax planning and mortgage qualification don't always have identical objectives.
If you're planning a significant home purchase, I recommend discussing the timing with your tax professional and mortgage professional before making assumptions about how a change will affect your ability to qualify.
This is a question I hear frequently.
Certain non-cash expenses, including some depreciation, may receive favorable treatment in a mortgage income analysis, depending upon the type of expense, business structure, mortgage program and applicable underwriting requirements.
However, I don't believe in telling a borrower:
“Don't worry. We'll just add all the depreciation back.”
That's too simplistic.
The correct approach is to review the actual tax returns and determine which adjustments are permitted under the applicable guidelines.
Mortgage underwriting isn't concerned only with how much you earned.
The direction and stability of the income can matter as well.
For example:
2024 income: $180,000
2025 income: $210,000
may be viewed differently from:
2024 income: $210,000
2025 income: $140,000
A significant decline may require explanation or additional analysis.
The fact that income was higher in a prior year doesn't necessarily mean a lender can simply average the two years and ignore the decline.
That's why I want to see the actual income history.
Not necessarily.
Two years of history is a commonly encountered benchmark, but mortgage guidelines can permit different treatment under certain circumstances, including situations involving a shorter self-employment history supported by relevant prior experience or income history.
The exact requirements depend upon the mortgage program and circumstances.
If you've recently become self-employed, don't assume you automatically have to wait two full years before speaking with a mortgage professional.
Let me review the situation first.
Documentation varies depending upon the mortgage program and business structure, but it can potentially include:
Not every borrower needs every document on this list.
I prefer to determine what applies to your situation rather than asking you to collect unnecessary paperwork.
Historical tax returns don't always tell the entire story.
If the most recent tax return covers a year that ended months ago, underwriting may need additional information concerning the business's current performance.
That could include a year-to-date profit-and-loss statement or other current business documentation, depending upon the loan and circumstances.
This becomes particularly important when the business's current performance is materially different from prior years.
Some business owners maintain substantial assets inside their businesses.
The fact that the money is available doesn't automatically mean it should be withdrawn without analysis.
Depending upon the mortgage program and circumstances, using business assets may require documentation and an evaluation of whether removing those funds could negatively affect the business.
If you're planning to use business funds for a home purchase:
Tell me early.
Don't wait until a few days before closing to move a large amount of money from the business account into your personal account.
Mortgage underwriting often requires the source of funds used for a transaction to be documented.
For self-employed borrowers, frequent transfers between business and personal accounts can make the paper trail more complicated.
That doesn't mean you can't move money between accounts.
It means that during the mortgage process, good records can save a lot of time and questions.
If you're unsure about moving a significant amount of money:
Ask me first.
I recommend that any homebuyer obtain a good mortgage pre-approval before making an offer.
For self-employed borrowers, I think it's even more important.
Don't wait until you find a $900,000 house to discover that the income appearing on your tax returns supports a smaller mortgage than you expected.
I'd rather review your situation in advance.
That gives us time to determine:
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Self-employed borrowers routinely obtain conventional mortgages.
You don't necessarily need a special mortgage simply because you own a business.
If your income can be documented and meets applicable requirements, conventional financing may be entirely appropriate.
That's why I generally start by determining whether the borrower can qualify using traditional documentation before assuming an alternative mortgage program is necessary.
Self-employed borrowers purchasing higher-priced properties may require jumbo financing.
Jumbo lenders can differ in their:
This is an area where having access to multiple lenders can be particularly useful.
One lender's approach to a complicated self-employed borrower isn't necessarily identical to another's.
This is where the conversation becomes more nuanced.
Some borrowers have substantial businesses, assets and cash flow but report taxable income that doesn't support the mortgage they want under traditional agency guidelines.
Depending upon the circumstances, alternative-documentation or Non-QM mortgage programs may be available.
These can include programs that evaluate income differently from a traditional full-documentation conventional mortgage.
Examples in the broader mortgage market can include certain bank-statement programs and other alternative methods of documenting ability to repay.
These programs are not appropriate for everyone and generally have different pricing, down-payment, reserve and underwriting requirements.
I don't believe in moving someone into an alternative-documentation loan simply because they're self-employed.
First, let's determine whether traditional financing works.
If it doesn't, then we can evaluate whether another legitimate program is available and makes financial sense.
Certain Non-QM programs may allow eligible self-employed borrowers to document income using qualifying bank deposits rather than relying exclusively on the traditional tax-return income calculation.
The lender may analyze a specified period of personal or business bank statements and apply the program's methodology to determine qualifying income.
Requirements can vary substantially among lenders.
These programs may have:
A bank-statement mortgage isn't a loophole around qualification.
It's an alternative method of documenting income for borrowers who meet that program's requirements.
Business owners sometimes make significant changes for perfectly legitimate tax or operational reasons.
For example:
If you're also planning to purchase or refinance a home, those changes may affect the documentation or analysis of your income.
I'm not suggesting you make business decisions based on your mortgage.
But if a major mortgage transaction is approaching, it's worth discussing the timing with both your tax professional and mortgage professional.
Your CPA's job and my job are different.
Your CPA may appropriately focus on:
Tax planning
Business structure
Allowable deductions
Tax liability
I'm looking at:
Mortgage qualifying income
Loan guidelines
Debt-to-income ratios
Assets
Reserves
Mortgage structure
The best result often comes from everyone understanding what the borrower is trying to accomplish.
I don't provide tax advice, and I won't tell you what deductions you should or shouldn't take.
But I can explain how the information appearing on your financial documents may be evaluated for mortgage purposes.
After helping borrowers since 1999, here's what I recommend if you're self-employed and thinking about buying or refinancing:
Start early.
Don't wait until you're under contract.
Provide the actual documents.
A verbal estimate of what the business earns isn't enough to determine mortgage qualifying income accurately.
Don't assume gross revenue equals qualifying income.
It usually doesn't.
Don't assume every business expense can simply be added back.
The applicable mortgage guidelines determine what adjustments can be made.
Tell me about significant business changes.
Changes in ownership, structure or income can matter.
Don't move large amounts of business money without discussing it first.
Documentation may be required.
Don't automatically assume you need a Non-QM mortgage.
You may qualify perfectly well for conventional or jumbo financing.
And most importantly:
Let me calculate the income before you decide what price home you can afford.
Capital Funding Mortgage is an independent mortgage broker.
We're not limited to the mortgage products or underwriting approach of one bank.
That can be especially valuable for a self-employed borrower because lenders can differ in their:
That doesn't mean every borrower will have ten different solutions.
It means I have the ability to evaluate available alternatives rather than being restricted to one lender's product menu.
Capital Funding Mortgage Associates is based in Newtown, Bucks County, Pennsylvania, and serves borrowers throughout Pennsylvania and New Jersey.
If you're self-employed and considering buying a home or refinancing, I recommend speaking with me before you make assumptions about your qualifying income.
I'll review the situation and explain what I see.
You don't need to apply for a mortgage just to ask me a question.
John Madden
Owner, Capital Funding Mortgage Associates
Mortgage Professional Since 1999
NMLS #960139
