Why Self-Employment Makes Mortgages Harder
Let's be honest: getting a mortgage when you're self-employed is more complicated than it is for someone with a W-2 job. But "more complicated" doesn't mean impossible—millions of self-employed Americans buy homes every year.
The core challenge is simple: lenders want predictable income they can verify. A W-2 employee shows two pay stubs and they're done. Self-employed borrowers need to prove their business is real, profitable, and likely to continue.
Your income flexibility can actually help you. Unlike W-2 employees who are stuck with whatever their employer pays, you have some control over how your income appears on paper. The trick is understanding what lenders look for and preparing accordingly.
Who This Guide Covers
If any of these describe your income situation, this guide is for you:
- Self-employed business owners: You run your own business (LLC, S-Corp, sole proprietorship, partnership)
- Freelancers and consultants: You work with multiple clients without being an employee
- 1099 contractors: You receive 1099s instead of W-2s
- Gig workers: Uber, DoorDash, Instacart, TaskRabbit, etc.
- Commission-based earners: Real estate agents, salespeople, loan officers
- Variable income employees: Tips, bonuses, overtime make up significant income
- Part-time business owners: W-2 job plus side business income
- Recent career changers: Switched from W-2 to self-employment recently
The 2-Year Rule: What It Really Means
You've probably heard that you need "2 years of self-employment history" to get a mortgage. Here's what that actually means—and the exceptions.
The Standard Requirement
Most lenders want to see:
- 2 full years of tax returns showing self-employment income
- A business that's been operating for at least 2 years
- Stable or increasing income over those 2 years
Why 2 Years?
Lenders use 2 years to calculate your average income. If you made $80,000 in year one and $100,000 in year two, they might use $90,000 as your qualifying income. This averaging helps smooth out income fluctuations.
Exceptions and Workarounds
1-2 years of history: Some lenders will work with 12-24 months of self-employment if you have strong credit (720+), substantial down payment (20%+), previous experience in the same field as an employee, and documentation showing strong current business performance.
Same Industry Transition
If you were a W-2 employee in your field before going self-employed (like an accountant who started their own firm), some lenders will count your total industry experience.
Bank Statement Loans
Some lenders offer "non-QM" (non-qualified mortgage) loans that use bank statements instead of tax returns. These typically have higher rates but can be a path for newer self-employed borrowers.
How Lenders Actually Calculate Self-Employment Income
This is where most self-employed borrowers get tripped up. The income on your tax return is NOT the same as the income you'll qualify with.
The Tax Return Reality
As a business owner, you're probably used to minimizing taxable income through legitimate deductions—business expenses, depreciation, home office deductions, vehicle expenses, etc. Great for your tax bill. Problematic for your mortgage.
Lenders use your net income (after deductions) from your tax returns, not your gross revenue. If your business grossed $200,000 but you wrote off $120,000 in expenses, the lender sees $80,000 in income.
The good news: lenders will "add back" certain non-cash deductions to your income:
- Depreciation: This is the biggest add-back. If you depreciated $15,000 in equipment, that gets added to your qualifying income.
- Depletion: For certain natural resource businesses
- Business use of home: A portion may be added back
- Amortization: Non-cash startup cost deductions
These deductions stay deducted: employee wages and contractor payments, rent and lease payments, insurance premiums, office supplies and materials, marketing and advertising, and most actual cash expenses.
The Income Calculation Example
Let's say your Schedule C shows:
- Gross income: $180,000
- Total expenses: $95,000
- Net profit (Line 31): $85,000
- Depreciation claimed: $12,000
Your qualifying income: $85,000 + $12,000 = $97,000
Now average this with last year's calculation for your final qualifying income.
Your Self-Employment Documentation Checklist
Gather these documents BEFORE you apply. Being prepared speeds up the process and makes you look like a serious buyer.
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2 years of personal tax returns (all schedules)
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2 years of business tax returns (if applicable—partnerships, S-corps, C-corps)
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Year-to-date profit and loss statement
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Business license or registration
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2-3 months of bank statements (personal and business)
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CPA letter or accountant contact information
By Business Structure
Sole Proprietor / Single-Member LLC
- Schedule C from your 1040
- Business bank statements
Partnership / Multi-Member LLC
- Form 1065 (partnership return)
- Schedule K-1 showing your share
- Partnership agreement
S-Corporation
- Form 1120S (S-corp return)
- Schedule K-1
- W-2 from your S-corp (for salary paid to yourself)
C-Corporation
- Form 1120 (corporate return)
- W-2 and/or dividend documentation
Special Guidance for Freelancers and Gig Workers
If you're a freelancer, 1099 contractor, or gig economy worker, your situation has unique considerations.
The Gig Worker Challenge
Apps like Uber, DoorDash, and Instacart classify you as an independent contractor. To lenders, you're self-employed—even if it doesn't feel that way. That means you need to meet self-employment documentation requirements.
How to Strengthen Your Application
Keep meticulous records: Track every expense, every mile, every deposit. Use accounting software like QuickBooks Self-Employed or Wave.
Separate your finances: Have a dedicated bank account for business income and expenses. This makes it much easier to document your income.
Pay quarterly taxes: This demonstrates to lenders that you're treating your work as a real business.
Commission-Based Income
Real estate agents, salespeople, loan officers, and others who earn primarily through commissions face similar documentation requirements to self-employed borrowers.
If more than 25% of your income comes from commissions, bonuses, or overtime, most lenders require 2 years of history to calculate your average income.
Strategic Moves for Self-Employed Buyers
If you're planning to buy in the next 1-2 years, here are moves to make now:
1. Talk to a Lender EARLY
Get a pre-qualification conversation 12+ months before you want to buy. A lender who understands self-employment can tell you exactly what you need to do to qualify.
2. Be Strategic About Write-Offs
This is a real trade-off: aggressive tax deductions lower your qualifying income. In the year or two before buying, consider whether showing more income is worth paying more in taxes.
3. Keep Business and Personal Separate
Co-mingling funds is a red flag for lenders. Keep separate accounts for business and personal, even if you're a sole proprietor.
4. Build Your Down Payment
A larger down payment (20%+) can offset income documentation challenges. It gives lenders more confidence and gets you better rates.
Finding the Right Lender for Self-Employment
Not all lenders are created equal when it comes to self-employment income. Some will make your life miserable; others genuinely understand your situation.
Questions to Ask Lenders
- "How many self-employed borrowers have you closed in the past year?"
- "Do you have an underwriter who specializes in self-employment income?"
- "What documentation will you need beyond tax returns?"
- "How do you handle depreciation add-backs?"
- "Do you offer bank statement loans if needed?"
They ask detailed questions about your business. They can explain exactly how they'll calculate your income. They've worked with your business structure before. They don't seem frustrated or confused by your situation.
They seem uncertain about self-employment requirements. They request the same documents multiple times. They can't explain how your income will be calculated. They treat you like an inconvenience.
Alternative Loan Options (Non-QM Loans)
If traditional financing isn't working, "non-QM" (non-qualified mortgage) loans may be an option. These don't meet standard Fannie Mae/Freddie Mac guidelines but are legitimate loan products.
Bank Statement Loans: Instead of tax returns, lenders use 12-24 months of bank statements to calculate income. They look at deposits and may use 50-100% of deposits as qualifying income.
Non-QM loans are legitimate products but come with trade-offs (higher interest rates, larger down payments). Explore conventional options first—only consider non-QM if traditional financing isn't available.