How to get a mortgage when you’re self-employed

When applying for a mortgage, self-employed applicants need to be prepared to document their finances for the lender.

In addition to tax‑return‑based options, bank statement loans can help you qualify if deductions reduce your taxable income. Lenders generally consider you self-employed if you work as a freelancer or independent contractor and receive a 1099, file a Schedule C for your taxes, or have a business ownership stake of 25% or more.

Learn more about which documents you'll need, how lenders evaluate your income, your loan options, and tips for success.

Key takeaways:

• Self-employed borrowers need to provide additional documents to prove consistent income, the health of their business, and their creditworthiness.
• Preparation can ensure a smooth underwriting process and increase approval odds.
• Comparing mortgage types and rates is important to make sure you get a loan that meets your goals.

Qualifying for a mortgage when you’re self-employed

When you apply for a mortgage, your lender will review your finances in a process called underwriting. It’s the underwriter's job to determine how much risk the lender takes in qualifying you for a mortgage.

The underwriter looks at several factors, including:

• Employment. The lender wants to be sure you have a stable income and can afford the monthly payment. Stable income emphasizes consistency, a reliable history, and staying in the same or a similar line of work. There sometimes are special rules for seasonal employment.
• Credit check. Lenders want to know that you have a track record of paying your debts and bills on time. Self-employed borrowers may need a higher credit score to compensate for the less-predictable nature of their income.
• Debt-to-income ratio (DTI). This metric shows how much of your monthly income is required to pay your debts. A lower DTI shows you have more room in your budget for a monthly mortgage payment.
• Assets. You'll need to show you have the resources for a down payment and closing costs.
• Cash reserves. Having enough cash to afford several months of living expenses reassures lenders that you can make your mortgage payment even if you were to lose income.

To make the process as smooth as possible, prepare your documentation in advance. For self-employed borrowers, this could include bank statements, profit-and-loss statements, and income tax returns with all associated schedules. You also will want to include W-2s if you have income from traditional employment.

What are lenders looking for from self-employed borrowers?

Lenders look for the same things from self-employed borrowers as they do from anyone else. The difference is that you need to document yourself how much and how often you earn money.

In general, lenders will want to see the following:

• Income stability
• The location and nature of your self-employment
• The financial strength of your business
• The likelihood that your business can generate sufficient income in the future

These factors show up in your tax forms, bank statements, and other business paperwork.

Understanding loan options

Let’s look at the two common paths toward qualifying for a mortgage as a self-employed borrower. The first explores using something typically viewed as a type of asset as income, while the second treads a more well-worn road.

Bank statement loans

Bank statement loans treat the cash flow shown on your monthly statements as income for the purposes of qualification. For many self-employed borrowers, this is the best way to qualify because it shows your gross income before you subtract expenses and deductions for your income tax return.

While these deductions reduce what you owe, they also may limit the amount that can be used to qualify for a mortgage. The cash flow into your accounts from your bank statements is likely to be higher.

For Rocket Mortgage bank statement loans, clients must have at least 25% ownership in the business. If your personal account isn't used to fund the business, you can qualify with that account. In this case, you’re qualifying with what you’re paying yourself from the business.

You can qualify with business account statements, but you'll need a 50% ownership stake. If more than one owner is on the loan, aggregate ownership can be used if each client owns 25%. If you use your personal account to support the business, this may be your only option because your personal account is considered a business account.

To qualify for this loan option, the business must have been open for at least 2 years. Whichever account you're using, you'll qualify based on the most recent 12 months of bank statements.

Because of the nontraditional qualification methods, these loans may be considered riskier by lenders, and you can expect more stringent qualification requirements.

Here are some basic guidelines from Rocket Mortgage for a bank statement loan for a primary residence:

• Minimum down payment or home equity. You'll need 10% – 35%, depending on the loan purpose, number of units on the property, loan amount, and your credit score.
• Units. One to four.
• Loan amount. This varies by credit score but can reach $3.5 million for purchases and rate-and-term refinances. If you're taking cash out, the maximum is $2.5 million.
• Credit score. The minimum is 660 – 740 based on your down payment or equity and the loan amount.
• DTI. The maximum DTI is 50%.

Traditional loan options

Traditional loan options include conforming conventional loans and government-backed options such as FHA and VA loans.¹^,² These qualify with tax documents instead of bank statements.

When a client is self-employed, that means the following types of documents:

• 1099s
• K-1s
• Form 1120
• Form 1065
• Form 1120S
• Schedule E
• Schedule C
• All pages of personal and business tax returns for the last 2 years

While income can be challenging to prove, there are advantages to these loans as well:

• Down payments on primary residences are usually 5% or less. VA loans typically don’t require a down payment.
• DTI can be more flexible, especially on FHA and VA loans.
• Qualifying credit scores are usually between 580 and 620.³ While conforming conventional loans have no specific minimum score, lenders can set their own minimum. Moreover, higher credit scores lead to better interest rates.

How lenders evaluate self-employment income

Regardless of which type of loan you’re getting, lenders look at gross income, business expenses, and broader trends.

Gross income vs. net income

Gross income is all your earnings before taxes. Net income accounts for taxes and expenses. For example, if you have $200,000 in gross income, but $80,000 in expenses, your net income would be $120,000.

If you’re self-employed, your net income is what lenders use to qualify you for a loan. Depending on how your business is structured — such as a sole proprietorship, a partnership, or an S Corporation — your income may appear in different places on your tax returns.

Business expenses

Business expenses include everything related to the overhead of your business that isn't related to the cost of production. This might include:

• Rent or a mortgage on office space
• Employee benefits and salaries
• Equipment costs
• Utilities

With Rocket Mortgage bank statement loans, business expenses still matter because we apply an expense factor based on the number of employees you have and whether your business is a service or a physical product business.

The expense factor can be 20% – 80% of your business income. You also may submit a statement from a third-party CPA or tax preparer.

Income trends and projections

Lenders want to know your income level is likely to continue, so they’ll look for trends in your profit-and-loss statements and tax returns. If your income dropped year over year, you may be asked why and whether it’s temporary. Having paperwork ready to answer questions can make the process go more smoothly.

What documents do you need to provide?

You’ll need to document your employment and income. Again, it’s helpful to have your paperwork ready ahead of time to speed things up.

Employment verification

When you’re self-employed, you’re responsible for confirming your own employment. To qualify to use the income from bank statements, you need to show a 2-year history of operation through:

• A business license
• A tax preparer's letter
• A secretary of state filing

Your percentage of business ownership can be based on a letter from a CPA, an attorney, an enrolled agent, or a certified tax preparer. You also can show your operating agreement.

Acceptable documents that you can submit to verify your employment include:

• A letter from a licensed CPA
• A letter from a professional organization that verifies your membership
• A state or federal business license you hold
• A “doing business as” (DBA) certificate

In some cases, lenders may also review evidence of ongoing work – such as current contracts or recent invoices – as part of the overall picture of income stability.

Income and asset documentation

When it comes to verifying income and assets, it’s helpful to have documentation on all the following so your lender can provide the most potential qualification options:

• Personal tax returns. These include 1040s, 1099s, K-1s, W-2s, and tax schedules.
• Business tax returns. These are tax returns related to the business you own. Forms and schedules depend on your business structure.
• Bank statements. Depending on the type of loan you’re getting, bank statements may be used to show either income or savings for a down payment, reserves, and closing costs.
• Assets you own. If you have stocks, bonds, or other investments, they could be liquidated to fund reserves or closing costs.
• Retirement accounts. You may be allowed to pull from these in certain circumstances for a down payment. If you're nearing retirement, your lender may qualify you based on asset depletion. Asset depletion is the idea that regular withdrawals from your retirement account act as income that can be used to make your mortgage payment.

If you’ve been self-employed for less than 2 years

If you’ve been self-employed for less than 2 years, it’s still possible to get a mortgage, but you won’t be able to use bank statements to prove income. More traditional income verification through tax returns is necessary.

In addition, lenders want to see the following:

• Twelve consecutive months of business activity. This shows the business is at least well-established. There is a minimum track record that the lender can refer to.
• Twenty-four months in the same line of work. Even if your business is relatively new, if you had previously worked for a company in the same industry before opening your own shop a year ago, it shows the lender that you have experience. For example, maybe you spent years as an electrician with a W-2 before setting off on your own.
• Proof of education. Education shows that you have a long-term commitment to this line of work.
• Professional certifications: Lenders may look at professional certifications to get an idea of the work you're trained to do. In some cases, a certification may be legally required based on the industry you're in.

6 tips for self-employed mortgage applicants

We’ve gone over the basics, but how can you get ready as a self-employed mortgage applicant? Talk with one of our Home Loan Experts about your personal circumstances and check out these tips.

Reduce your DTI

DTI is the ratio of your monthly debt payments to your gross monthly income.

The DTI calculation is:

Minimum monthly debt payments ÷ pretax monthly income ×100

The lower your DTI, the more room you have in your budget for a mortgage payment.

If you plan to get a mortgage soon, the fastest way to reduce your DTI is to pay off debts with the highest monthly payments. If your purchase or refinance is a little further off, you may prefer to pay off the debts with the highest interest rate first.

Review your credit reports and habits

Not only is there usually a minimum credit score to qualify for a mortgage, but your credit score also affects your mortgage rate.

A few basic tips to keep your credit in check:

• Look for errors on your credit report. You don't want to be held responsible for the credit bureau's mistakes or fraudulent items.
• Make payments on time.
• Keep your credit-utilization ratio under 30% of your total revolving balances.
• Don’t open new lines of credit.

Keep business and personal expenses separate

When accounts are clearly separated, lenders can more easily see which funds are available for your mortgage payment. You can show the amount you're paying yourself through a personal account. It also allows you to do a bank statement loan with as little as 25% ownership.

Beyond this, inform your lender of any one-time expenses. You should also be prepared to provide an estimate of your expenses based on the number of employees and the type of work you do. Doing these things will help your lender ensure your income is accurately qualified.

Compare different mortgage types

It’s important to think about how to choose the best mortgage for you. Bank statement loans allow you to show bank statements as proof of income, which may indicate more qualifying income to a lender. On the other hand, more traditional mortgage loans may let you qualify with a lower credit score and down payment.

If you qualify for several options, it may come down to the mortgage rate.

Consider making a larger down payment

A down payment is money paid at the close of your loan. The larger your down payment, the less risk your lender is taking, so you may get a better mortgage interest rate.

A larger down payment also means a lower monthly payment, which may be helpful if you don't show as much income on your tax return.

Down payment assistance from third-party organizations can be used toward your down payment and closing costs. It may be offered in the form of grants or deferred, forgivable, or traditional loans. Check with your lender to be sure they accept assistance from the provider you qualify with before applying.

Consider applying with a co-signer or co-borrower

A co-borrower agrees to take responsibility for the loan if you default. From a qualification perspective, a co-borrower and a co-signer are the same thing.

The advantage of this is that they can add their income to your application to help you qualify if you show a lower income due to self-employment. The ideal co-borrower is someone with a high income and low debt.

FAQ

Here are answers to common questions about qualifying for a mortgage when self-employed.

How many years of tax returns do I need?

Most lenders require 2 years of personal and business tax returns when you’re self-employed. In some cases, borrowers with less than 2 years of self-employment may qualify if they have consistent income in the same line of work and provide additional documentation.

Do lenders look at gross or net income for self-employed borrowers?

Lenders typically look at net income, not gross revenue, for self-employed borrowers. Net income reflects what you earn after business expenses are deducted, which helps lenders assess how much of your income is available for your mortgage payment.

Can I use business income to qualify for a mortgage?

Yes, you can use business income to qualify for a mortgage. Lenders typically review this income through business tax returns, personal tax returns, or bank statements, depending on the loan type and your business structure.

Can an LLC get a 30-year mortgage?

Yes, it’s possible to get a 30-year mortgage through an LLC. In most cases, the mortgage is still based on your personal income and credit, and Rocket Mortgage may allow an LLC to be involved if all loan clients own at least 51% of the business.

The bottom line: Your self-employment can be a path to homeownership

Getting a mortgage while self-employed does have its hurdles, but you can get both bank statement loans and traditional financing. To give yourself the most options, separate your business and personal accounts, keep records of your business operations, and have tax returns going back 2 years.

Every situation is different, so we recommend speaking with one of our Home Loan Experts. You can get your application started online.

¹ Rocket Mortgage is not acting on behalf of FHA or HUD.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

³ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Rocket Mortgage is a trademark or service mark of Rocket Mortgage LLC or its affiliates.