Investors & Self-Employed: How You Can Qualify for a Mortgage

Why tax returns can make you look like you earn less

When you work for yourself, you can write off business costs: your truck, phone, tools, supplies, a home office. That lowers the income you pay tax on. It is smart for taxes. But a standard mortgage, like a conventional or FHA loan, usually counts the income after those write-offs, most often from your last 2 years of tax returns.

Say your business brings in $150,000 a year. After write-offs, your tax return shows $45,000. A lender using your returns sees $45,000, not $150,000. That can shrink how much you can borrow, or stop the loan.

Other ways to show your income

Loans that use other papers are often called non-QM loans (short for "non-qualified mortgage," meaning they fall outside the standard federal "qualified mortgage" rules). For a home you will live in, the lender still has to check that you can repay. It just uses different proof.

• Bank statements. The lender adds up 12 or 24 months of deposits into your business or personal account. Then it takes off an "expense factor," a set percentage for business costs. Factors commonly run from about 15% for a service business with few costs up to about 50% for a business with bigger costs. Some lenders accept a CPA (certified public accountant) letter showing your real expense ratio instead. With select programs, buyers of a home they will live in can put as little as 10% down (90% loan-to-value at a 680+ score on loans up to $1 million). Learn more about bank statement loans.
• 1099 only. If clients pay you on 1099 forms, some programs use those forms instead of tax returns, with a small flat expense factor (about 10% with select programs). See 1099 loans.
• P&L (profit and loss) statement. A one-page report of what the business earned and spent, often prepared or signed by a CPA or tax preparer. Some programs use it alone, commonly with a 680+ score. See P&L loans.
• Asset depletion. If you have large savings or investments, a lender may turn them into monthly "income" by dividing them by a set number of months (commonly 60 or 84). For example, $600,000 ÷ 60 = $10,000 a month. See asset depletion loans.
• ITIN loans. If you file taxes with an ITIN (Individual Taxpayer Identification Number) instead of a Social Security number, some lenders offer ITIN loans, usually with a bigger down payment. See ITIN loans.

Loans for investors: the property pays the bills

If you are buying a rental, many loans look at the property more than at you.

• DSCR loans. DSCR stands for debt service coverage ratio. It is the monthly rent divided by PITIA: principal, interest, taxes, insurance and association (HOA) dues. Your personal DTI is not used. A DSCR of 1.00 means the rent covers the payment exactly. Many lenders want 1.00 or higher; some allow lower at less leverage. With select programs you can borrow up to 85% of the price (15% down) with a 700+ score on loans up to $1 million. Read the DSCR guide or try the DSCR calculator.
• Fix-and-flip loans. Short-term loans to buy, repair and sell a house. Lenders size them using the ARV (after-repair value, what the home should be worth when done) and LTC (loan-to-cost, the loan compared with price plus repairs). Repair money is usually paid in draws: you do the work, the lender inspects it, then releases the next payment. See fix-and-flip loans.
• Bridge loans. Short-term loans that "bridge" a gap, like buying before you sell or before a property is ready for a long-term loan. See bridge loans.
• Portfolio and blanket loans. One loan that covers several rental properties. See portfolio and blanket loans.
• Commercial loans. For 5+ unit apartments, mixed-use, retail, office and similar buildings. They lean mostly on the property's income. See commercial property loans.

Business-purpose vs. consumer loans

A consumer loan is for a home you or your family live in. Federal rules protect you: the lender must check your ability to repay, and you get a Loan Estimate and a Closing Disclosure. A business-purpose loan is for investing, like a rental or a flip. Many consumer rules do not apply to business-purpose credit. DSCR and fix-and-flip loans are usually business-purpose. A bank statement loan on your own home is a consumer loan. With a business-purpose loan, read every page and ask questions, because fewer rules require the lender to explain the terms.

The trade-offs

• Higher cost. Rates and fees are usually higher than on standard loans.
• Bigger down payment. Investors often put 15% to 25% or more down. Lower scores usually mean more down.
• Prepayment penalties. Many investor loans charge a fee if you pay off or refinance early, often a penalty that gets smaller each year for the first few years. Ask if a no-penalty option exists and what it costs.
• Reserves. Some programs want savings left after closing, measured in months of payments.

Words to know

• Non-QM
• Bank statement loan
• Expense factor
• P&L
• Asset depletion
• DSCR
• PITIA
• Prepayment penalty

See the full mortgage glossary →

Questions people ask

Sources

• Fannie Mae Selling Guide: self-employed borrower documentation
• CFPB: Regulation Z §1026.43, ability-to-repay and qualified mortgages
• CFPB: Regulation Z §1026.3, exempt transactions (business-purpose credit)
• IRS: About Form 1099-NEC
• IRS: Individual Taxpayer Identification Number (ITIN)

Program figures are typical, vary by lender and can change. "Select programs" means at least one current lending program; it is not an offer or approval.