Self-Employed Mortgage: How to Qualify With Tax Returns

Can you get a mortgage if you’re self-employed?

Yes. Federal Ability-to-Repay rules require every lender to verify that you can repay, and for business owners that verification usually comes from IRS returns rather than pay stubs. The program rules are clear:

• Fannie Mae: “generally requires” a two-year history of earnings and defines a self-employed borrower as anyone with a 25% or greater ownership interest in a business.
• FHA: considers self-employment income after two years, or after one to two years if you worked in the same or a related line of work for at least two years before (HUD Handbook 4000.1).
• VA: treats self-employment income as stable after two years. Less than two years can count with prior related employment or specialized training, and less than one year rarely qualifies (38 CFR 36.4340).

What makes a self-employed mortgage harder isn’t eligibility. It’s documentation and how your taxable income compares with the loan you want.

Self-employed mortgage requirements: history, tax returns, P&L and CPA letters

Income history

Two years in business is the default. Fannie Mae will consider less than two years if your most recent signed personal and business returns show a full 12 months of income from the current business, and you document prior income at the same or a higher level, in a field offering the same products or services or in a job with similar responsibilities. A nurse who opens a home-health agency, or an electrician who goes out on his own, fits that pattern.

Tax returns

Expect to provide signed federal returns for the last two years with all schedules: Schedule C for sole proprietors, Schedule E and K-1s for partnerships and S corporations, and the business returns themselves (Form 1065, 1120-S or 1120). Lenders may use IRS transcripts in place of copies. Two Fannie Mae exceptions help established owners:

• One year of returns if the business has existed for five years and you’ve owned 25% or more for five consecutive years. The lender still completes a cash flow analysis.
• No business returns if you provide two years of personal returns, use personal funds for the down payment, closing costs and reserves, have been self-employed in the same business for five years and your personal returns show rising self-employment income.

Profit and loss statements and CPA letters

When your most recent return is several months old, a lender may ask for a year-to-date profit and loss statement, sometimes with business bank statements, to confirm income hasn’t dropped. Some lenders also ask for a letter from your CPA or tax preparer confirming the business is active, or that a withdrawal of business funds won’t hurt operations. These are lender requests, not universal agency rules, so ask early what your lender needs.

How lenders calculate self-employed income

Underwriters use Fannie Mae’s Cash Flow Analysis (Form 1084), Freddie Mac’s Form 91 or an approved calculator to rebuild your income from the tax return. The process looks like this:

1. Start with net profit (Schedule C line 31) or your share of ordinary income from the K-1.
2. Add back non-cash or one-time expenses. On Schedule C, Fannie Mae requires lenders to add back depreciation, depletion, business use of home, amortization and casualty losses.
3. Subtract non-recurring income and the meals exclusion.
4. For K-1 income, confirm you actually received distributions consistent with the income used, or show the business has the liquidity to pay them. Fannie Mae says a business liquidity ratio of one or greater is generally sufficient.
5. Average the two years and divide by 12. If income is declining, the lender uses the lower, more recent figure or may not use the income at all.

Worked example: Schedule C income for a Texas contractor

Income is rising, so the lender can use the average. At a 45% debt-to-income ratio with $600 in other monthly debts, this borrower can carry a total house payment of about $3,319. With 10% down, an example 6.5% rate, Texas property taxes at an assumed 2.0% combined rate, $250 a month for insurance and an estimated $70 for PMI, that supports a purchase price of roughly $405,000. These are illustrative figures, not a quote.

Now reverse the years. If 2024 showed $109,000 and 2025 showed $100,000, the lender would typically qualify on $100,000 and ask why income fell. Under FHA rules, a decline of more than 20% sends the file to manual underwriting. For how DTI limits differ by program, see our guide to a good debt-to-income ratio for a mortgage.

Why write-offs can shrink your loan amount

Every dollar you deduct as a business expense lowers the income a lender can use, unless it’s one of the add-backs above. Take the contractor in the example and add $20,000 a year of deductible expenses such as a vehicle, equipment financed on payments or a home office build-out that isn’t depreciation.

• Qualifying income falls from $104,500 to $84,500, or $7,042 a month.
• The maximum house payment at 45% DTI drops from about $3,319 to about $2,569.
• The supported purchase price falls from roughly $405,000 to roughly $305,000.

That $20,000 in deductions might save a few thousand dollars in tax and cost about $100,000 in buying power. If you plan to buy within the next two years, sit down with your CPA and your loan officer together before filing. Two other points:

• Business debt in your name counts. If you personally guarantee a business loan, the payment goes into your DTI unless the business pays it and the lender documents that.
• Amended returns get scrutiny. Filing an amended return right before applying to show more income usually prompts questions and may require proof the tax was paid.

Loan options: conventional, FHA, VA, jumbo and bank-statement loans

Conventional: Herring’s conventional home loans are often the best fit for established owners with solid credit, because PMI can be removed later and there’s no upfront mortgage insurance.

Jumbo: if you need more than $832,750 in most Texas counties, Herring’s jumbo loans page notes a credit score of 700 is typically required, along with at least 20% down and 6-12 months of reserves. Self-employed jumbo borrowers should expect full tax return documentation.

Bank-statement loans: these non-QM loans qualify you on deposits rather than tax returns. They aren’t eligible for Fannie Mae, Freddie Mac, FHA or VA, and they usually cost more.

Business owners in specialized fields have other paths too. Medical and dental practice owners may want to compare a conventional loan with physician loans.

Owners in regulated industries (cannabis business owners)

Owners of state-licensed marijuana businesses often get turned away by mortgage lenders even with strong income, because the business is still illegal under federal law. Herring Bank offers home loans for marijuana business owners and employees: a home loan program for people who earn documented, state-legal income from the cannabis industry. According to the program page, the program is:

• For cannabis business owners and employees in Texas, Colorado and Oklahoma
• For owners, a business in operation at least three years
• Purchase only, not refinancing
• For a primary residence only, with no investment or vacation homes
• For single-family homes or planned unit developments, with no condos or manufactured homes

The program page also covers down payment, credit and income requirements, use of personal funds and business banking. Plan to document your state-legal income the same way any self-employed or salaried borrower would, with tax returns, pay records and bank statements. A Herring loan officer can walk you through current program details.

Self-employed document checklist

• Signed personal federal tax returns, last two years, all schedules (or one year if you meet Fannie Mae’s five-year rule)
• Business returns (1065, 1120-S or 1120) and all K-1s for the same years, unless waived
• Year-to-date profit and loss statement, if the lender asks
• Two months of personal bank statements; business statements if you’ll use business funds
• Proof the business exists: business license, articles of organization, IRS EIN confirmation letter or a CPA letter
• Documentation of business debts you personally guarantee and proof if the business pays them
• Explanation of any drop in income, large one-time expense or gap in self-employment. See how to write a letter of explanation.
• Photo ID and, for VA loans, your Certificate of Eligibility or DD-214

Using business money for the down payment? Fannie Mae requires the lender to run a business cash flow analysis to confirm the withdrawal won’t hurt the business, which can mean several months of business statements or a current balance sheet. Moving funds to a personal account well ahead of time, with a clear paper trail, makes this simpler. For the broader qualifying picture, read the basics of qualifying for a mortgage loan.

Herring Bank NMLS #415783 | Member FDIC | Equal Housing Lender. This article is for educational purposes only and does not constitute financial, legal or tax advice. It is not a commitment to lend. Loan programs, rates and eligibility requirements are subject to change without notice. Payment examples use assumed rates, taxes and insurance and are not a quote. Consult a tax professional about how business deductions affect your taxes.