How To Buy A House Being Self Employed

If you're self-employed, making good money, and still got denied for a mortgage, you're not alone. In this guide, we break down why lenders turn away high-earning entrepreneurs and what you can do to get approved. From income calculations to alternative financing options, we walk you through what really matters to underwriters and how to avoid common pitfalls.

Why Self-Employed Borrowers Get Denied

You can earn $200,000 a year and still get denied. Why? Because your lender doesn't care what you make—they care what you can prove on paper. This is especially frustrating for entrepreneurs with healthy businesses, but optimized tax strategies that reduce net income on paper.

The key problem: Underwriters rely on your IRS-reported income. So while you may have strong cash flow, deductions and write-offs lower your qualifying income.

"We don’t care what you earned. We care what you paid taxes on." —Josh Lewis

The W-2 vs. Self-Employed Dilemma

W-2 employees simply submit pay stubs and W-2 forms. Self-employed borrowers face a much more intense documentation burden. This can include:

• Two years of personal and business tax returns
• Profit & Loss statements (possibly CPA-prepared)
• 12–24 months of business bank statements
• W-2s and pay stubs if you run payroll for yourself

The catch? Business expenses that reduce tax liability also reduce qualifying income—so the more write-offs, the less you may qualify for.

Lender Knowledge Matters More Than Rates

While most borrowers focus on interest rates, self-employed buyers must prioritize working with an experienced loan officer who understands how to analyze tax returns. Many loan officers outsource this step or guess, resulting in miscalculated income and loan denials.

"Unless you have an advocate on your side, you’re likely to come in light."

How Self-Employed Income Is Calculated

The way your income is calculated depends on your business structure. Here's a breakdown of how different types are treated:

Schedule C Sole Proprietors

• Report business income/expenses directly on IRS Schedule C
• Start with net income (after expenses)
• Underwriters may add back non-cash items like depreciation and home office deductions
• Cannot add back expenses like meals, travel, or cost of goods sold

S-Corp, C-Corp, LLCs, and Partnerships

• Must submit both personal (1040) and business (1120, 1120S, or 1065) tax returns
• W-2 income alone doesn’t count—underwriters look at total business performance
• Business losses can offset your qualifying income even if you paid yourself through payroll
• Distributions, K-1 income, and retained earnings may be considered depending on structure and consistency

If your business pays you a W-2 and also loses money, underwriters factor in the net business result—not just what your W-2 says you earned.

How Underwriters View Declining Income

Consistency is key. If income has dropped year over year, underwriters may flag it as a risk. Here’s what helps:

• Letter of explanation detailing one-time events (e.g., pandemic, relocation, business restructuring)
• Year-to-date P&L statements showing recovery
• Recent bank statements backing up current revenue

Proactively documenting the reason for income dips gives lenders confidence in your future ability to repay.

1099 vs. W-2: Understanding Employment Status

Many borrowers confuse 1099 with employment. A 1099 is self-employment income and requires full documentation just like any other business revenue.

If you switch from W-2 to 1099, you'll need:

• One full year of filed taxes showing 1099 income
• Explanation and proof of business viability
• Low or well-documented business expenses

This transition can be tricky. Plan ahead if you're changing employment types.

Non-QM Loans: Flexible Options for Self-Employed Borrowers

Bank Statement Loans

• Use 12–24 months of business or personal bank deposits
• Lenders apply an assumed expense ratio (usually 50%) unless supported otherwise
• Can require CPA letter to verify expense assumptions

P&L Only Loans and Other Non-QM Options

• Use CPA-prepared Profit & Loss as sole income document
• Asset depletion (use savings/investments as income)
• 12-month self-employment seasoning or less

These loans allow creative structuring but come with higher interest rates and larger down payment requirements.

Down Payment, Credit Score & DTI: What Changes?

For conventional and government-backed loans (FHA, VA, USDA), the rules don’t change just because you're self-employed. But income calculation becomes more conservative.

With non-QM loans:

• Minimum 10–20% down payment
• Credit scores above 700 recommended
• Lower DTI = better terms

Pre-Tax Planning: Get Strategic Before You File

Want to buy within the next year? Talk to a mortgage advisor before filing taxes. Here’s what to prep:

• 2 years of personal tax returns
• 2 years of business tax returns (if applicable)
• W-2s, pay stubs (if on payroll)
• 12–24 months business bank statements (if pursuing bank statement loan)

Loan Program Comparison Chart

Final Thoughts: You Can Qualify with the Right Plan

Self-employment doesn’t disqualify you. But it does require planning, expert guidance, and the right documentation. A great mortgage broker can match you to the best lender and help present your income in the best light possible.

👉 Get Pre-Approved or Start Your Income Planning

Start your plan here

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Check out the recent Rent. article we were featured in:

As the housing market continues to evolve and inflation remains a key concern in many parts of the U.S., moving costs in 2025 are experiencing notable shifts.

In this Rent. guide, we’ll take an in-depth look at what to expect this moving season and how to save on costs, whether you’re buying a home in Annapolis, or renting an idyllic San Diego apartment.

Read the full article here: Understanding 2025 Moving Costs | Rent.

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