Self-Employed? Here is How Lenders Look at Your Income

Here is the honest truth: getting a mortgage when you are self-employed is harder than when you are a W-2 employee. Not because you are less creditworthy, but because lenders have a harder time verifying your income.

When you are a W-2 employee, your income is simple: your pay stubs show what you make, and your W-2 confirms it. When you are self-employed, your income is whatever is left after business expenses and write-offs. And if you are like most smart business owners, you write off as much as possible to lower your tax bill. That is good for your taxes but bad for your mortgage qualification, because lenders use your taxable income, not your gross revenue.

Here is what I would tell you if you were my little brother: do not give up. There are loan programs built specifically for self-employed borrowers. You just need to know which ones to use and how to prepare.

For a conventional loan, the lender looks at your net business income, which is your gross revenue minus business expenses. They average your last two years of tax returns. If you made $100,000 in 2022 and $120,000 in 2023, your qualifying income is about $110,000.

Here is the problem: if you wrote off $50,000 in expenses in 2023, your taxable income might show $70,000 even though your business generated $120,000. The lender uses the $70,000, not the $120,000. This is why many self-employed borrowers get approved for less than they expect.

If your income is increasing year over year, the lender may use the most recent year alone (called a trend analysis). If your income is declining, they will use the lower year or average it, which can hurt your qualification.

Here is the solution for many self-employed borrowers: a bank statement loan. Instead of looking at your tax returns, the lender looks at 12 to 24 months of your bank statements and calculates your income from the deposits.

The lender typically takes your total deposits over 12 or 24 months, subtracts a business expense factor (often 20 to 50 percent depending on your industry), and uses the result as your qualifying income. This can be significantly higher than your taxable income, especially if you have a lot of write-offs.

Bank statement loans require a credit score of 660 or above, 10 to 20 percent down, and 2 years of self-employment history. The rates are higher than conventional, but there is no mortgage insurance. I compare both options (conventional with tax returns vs. bank statement) so you can see which gives you a better qualification and lower total cost.

A P&L (Profit and Loss) statement loan is another non-QM option for self-employed borrowers. Instead of tax returns or bank statements, the lender uses a CPA-prepared or accountant-prepared P&L statement to verify your income.

This is a good option if your bank statements are complex (multiple accounts, transfers between accounts, mixed personal and business) or if your P&L shows higher income than your bank deposits would suggest. The P&L must be prepared by a licensed CPA or accountant, not self-prepared.

P&L loans typically require 20 percent down, a credit score of 660 or above, and 2 years of self-employment. Like bank statement loans, there is no mortgage insurance. I help you determine whether a P&L loan or a bank statement loan is the better fit for your situation.

If you are self-employed and buying an investment property, a DSCR loan may be the best option. DSCR loans do not look at your personal income at all. They qualify you based on the rental income the property generates.

This is powerful for self-employed investors whose personal income (on tax returns) is too low or too complex to qualify for a conventional investment property loan. With a DSCR loan, you can keep buying properties without your personal DTI holding you back.

DSCR loans require 20 to 25 percent down, a credit score of 640 or above, and a DSCR of 1.0 or higher (rent covers the mortgage). I help you analyze the property before you make an offer to make sure the numbers work.

Here is what I would do if I were you. First, talk to me before you start shopping. I can review your situation and tell you which loan program will work best. If conventional will not give you enough qualification, I will tell you about bank statement or P&L options upfront.

Second, keep your business and personal finances separate. Lenders want to see clean bank statements where business deposits go into a business account and personal expenses come from a personal account. Mixing them makes it harder to calculate your income.

Third, keep good records. If you are applying for a bank statement loan, having 12 to 24 months of clean, consistent bank statements makes the process smoother. If you are applying for a P&L loan, have your CPA prepare an updated P&L before you apply.

Fourth, do not write off everything possible in the year before you buy. If you know you are going to buy a home in the next 12 months, talk to your CPA about the trade-off between tax write-offs and mortgage qualification. Sometimes keeping your taxable income a bit higher for one year makes a big difference in what you can qualify for.

For a conventional loan: 2 years of personal and business tax returns, 2 months of bank statements, a year-to-date P&L, and your business license or formation documents.

For a bank statement loan: 12 to 24 months of personal or business bank statements, a year-to-date P&L (self-prepared is usually fine), your business license, and a letter from your CPA verifying you have been self-employed for 2+ years.

For a P&L loan: a CPA-prepared P&L statement for the most recent 12 to 24 months, 2 months of bank statements, your business license, and standard credit and asset documentation.

Call me at (949) 391-7909 and I will tell you exactly which documents to gather based on the loan program that fits your situation. I make the process as simple as possible.