Getting a mortgage when self-employed
Your income is real. The problem is that lenders use your net figure after deductions, which is often much lower than what you actually earn.
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The key facts
Self-employed numbers
Revenue is not qualifying income
Deductions that lowered your tax bill also lower what a lender counts.
Self-employed borrowers face the same standard as everyone else. They just get judged on a different number.
Lenders use your net income after deductions. Every write-off that cut your tax bill also cut the income a lender counts.
Revenue is not qualifying income
A worked example on $180,000 of gross revenue
Lenders start from net income after business deductions, then add back items like depreciation.
The problem
Why the numbers do not match
An example of how deductions change what a lender sees.
| Line | Amount | What a lender does with it |
|---|---|---|
| Gross revenue | $180,000 | Not used |
| Business expenses | $62,000 | Subtracted |
| Vehicle and home office | $14,000 | Subtracted |
| Depreciation | $9,000 | Often added back |
| Net income on returns | $104,000 | The starting point |
| Qualifying income | About $113,000 | After typical add-backs |
Scroll sideways to see all columns.
Add-backs vary. Depreciation and some one-off expenses can often be added back, but not most deductions.
What helps
Making a self-employed file work
Two years in the same line of work
This is the standard. A shorter history can work, but it narrows your choice of lender, since many apply an overlay here.
Plan deductions ahead of buying
Big write-offs in the two years before you apply cut what you qualify for. Speak to your accountant early.
Keep business and personal separate
Mixed accounts make a file harder to read and slower through underwriting.
Verified bank data helps
Deposit patterns show income your tax returns understate. That is what connected verification is good at.
Expect more documents later
Two years of tax returns with all schedules, plus W-2s if you also draw a salary. Often a year-to-date profit and loss at full application.
Stability beats growth
A steady figure across two years reads better than a spike. Lenders often average the two, and a falling trend raises questions.
Also true
Things that catch people out
A new business entity resets the clock
Changing from sole trader to a company can look like a brand new business.
Large deposits still need sourcing
Business income moving into a personal account needs a clear trail, the same sourcing rule that applies to gift funds.
A declining year is a problem
If this year is down on last, lenders may use the lower figure rather than the average.
Partial ownership needs documenting
If you own part of a business, expect questions about your share and whether you can access the income.
Questions
Common questions
How do lenders calculate self-employed income?
They start with net income after business deductions on your tax returns, then add back certain items such as depreciation. Revenue is not used.
How long do I need to be self-employed to get a mortgage?
Usually two years in the same line of work. A shorter history can sometimes work with strong compensating factors, but fewer lenders will consider it.
Do write-offs affect my mortgage?
Yes, directly. Deductions that lower your taxable income also lower the income a lender will count, so plan them in the years before you buy.
What documents do self-employed borrowers need?
Typically two years of tax returns with all schedules, plus a year-to-date profit and loss statement. None of this is needed for a Preqly pre-approval.
Can I get a mortgage with one year of self-employment?
It is harder. Some lenders will consider it where you were in the same field as an employee beforehand, but expect a narrower choice.
Keep reading
Related guides
How to qualify
The four factors lenders weigh together.
Documents needed
The full list, including self-employed extras.
Mortgage readiness
Where you stand today, and what to fix.
Independent sources
- Consumer Financial Protection Bureau — how income is documented for self-employed borrowers
See your real number
Verified income and assets, in about 90 seconds.
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