Working for yourself should not keep you from buying a home, but it changes how a lender sees your income. Instead of pay stubs, most loans look at the tax returns you file, after your write offs. This guide explains how conventional and FHA loans calculate self employed income in 2026, when a bank statement, 1099 or P&L loan makes more sense, and how to prepare before you apply.
Quick answer
Lenders treat you as self employed if you own 25% or more of a business. Conventional and FHA loans usually qualify you on your last two years of tax returns, using net income after deductions, with a few items such as depreciation added back. Fannie Mae can accept one year of returns once you have owned the business for five years, and less than two years of self employment can work when your returns show at least a full year and you did the same kind of work before. If write offs cut your taxable income too far, bank statement loans and other non QM programs qualify you on 12 or 24 months of deposits instead, usually with a larger down payment and a higher rate.
Who counts as self employed for a mortgage?
Fannie Mae, Freddie Mac and FHA use the same line: if you own 25% or more of a business, the income you earn from it is self employment income. That covers sole proprietors who file Schedule C, owners of S corporations, partnerships and LLCs, and independent contractors paid on 1099s, including real estate agents, contractors, consultants and gig workers.
If you own less than 25% of the business you work for, lenders generally treat your pay like wages from any other employer, documented with W2s and pay stubs.
How do conventional and FHA loans calculate self employed income?
Both start from your tax returns, but the rules differ in the details. Here is how they compare:
| Rule | Conventional (Fannie Mae and Freddie Mac) | FHA |
|---|---|---|
| History | Usually two years. Less than two years can work when your latest returns show at least a full year of self employment; Freddie Mac also looks for a two year record in the same or a similar line of work. | Two years. Between one and two years only if you worked at least two years before in the same or a related line of work. |
| Tax returns | Two years of personal and business returns. Fannie Mae accepts one year when the business has existed for five years and you have owned 25% or more for five years. | Two years of personal returns. Business returns can be waived when your personal returns show rising income, funds to close do not come from business accounts and the loan is not a cash out refinance. |
| Income used | The lender’s written analysis of your returns, often on Fannie Mae’s cash flow analysis form | The lesser of your two year average and your most recent year |
| Declining income | Must be analyzed and explained | A drop of more than 20% requires manual underwriting |
| Year to date numbers | May be requested to support the analysis | A year to date profit and loss statement if more than a calendar quarter has passed since your tax year ended |
Lenders usually confirm your returns directly with the IRS, so the figures you report are the figures they use. Conventional loans follow the same 2026 limits as any other buyer, up to $1,249,125 for a one unit home in Orange County.
How do tax write offs affect what you qualify for?
Your deductions lower your taxes, and they also lower the income a lender can count. For a sole proprietor, the starting point is the net profit on Schedule C, not gross receipts. Fannie Mae has lenders add back certain items that do not take cash out of the business, including depreciation, depletion, business use of your home, amortization and casualty losses, and subtract income that will not recur.
Here is a hypothetical example for a consultant who files Schedule C:
| Line | 2024 | 2025 |
|---|---|---|
| Gross receipts | $210,000 | $236,000 |
| Net profit on Schedule C | $86,000 | $98,000 |
| Add back depreciation | $6,000 | $7,000 |
| Add back business use of home | $3,000 | $3,000 |
| Qualifying income | $95,000 | $108,000 |
Averaged over two years, that is $101,500 a year, or about $8,458 a month. The business brought in more than $220,000 a year, but the lender can count less than half of it. That trade off between lower taxes now and more buying power later is worth a conversation with your tax professional before you file, especially in the two years before you plan to buy.
If your income fell from one year to the next, expect questions. FHA requires manual underwriting when income declines by more than 20%, and it qualifies you on the lower of your two year average and your most recent year.
Not sure which way to document your income?
Jon can review your last two tax returns and your bank statements and show what each path qualifies you for.
What are bank statement, 1099 and other non QM options?
When your tax returns understate what the business really earns, non QM loans qualify you with other records. These are lender designed programs, so details vary, but they still have to meet the federal ability to repay rule, which requires the lender to verify income with reasonably reliable third party records such as tax returns or financial institution records.
- Bank statement loans: 12 or 24 months of personal or business bank statements. Lenders count eligible deposits and, for business accounts, apply an expense factor or use an expense figure from your CPA or tax preparer. Transfers between your own accounts and large deposits you cannot explain are usually excluded.
- 1099 loans: for contractors paid on 1099s, one or two years of 1099 forms, usually with a set expense factor.
- Profit and loss statement loans: a 12 or 24 month profit and loss statement prepared or reviewed by a CPA or tax preparer, sometimes supported by recent bank statements.
- Asset based qualifying: some lenders turn verified savings and investments into a monthly income figure over a set term.
Expect a larger down payment than a conventional loan, often 10% to 20% or more, several months of reserves and a higher rate. On a home you will live in, these are non QM consumer loans, and federal rules only allow a prepayment penalty on certain qualified mortgages, so a bank statement loan on your home should not carry one.
Tip: A bank statement loan often qualifies a business owner for more than tax returns do, but the higher rate adds up. Some borrowers use one to buy now and refinance into a conventional loan once two years of returns support it.
Which path fits your situation?
| Your situation | Path to look at first |
|---|---|
| Two or more years in business, and taxable income supports the payment | Conventional or FHA with tax returns |
| Strong deposits, but large write offs | Bank statement loan |
| Paid on 1099s by one or a few clients | 1099 loan, or conventional using your Schedule C |
| In business less than two years, same field as before | Conventional or FHA using your prior work history |
| Large savings, lower taxable income | Asset based qualifying |
| Borrowing more than $1,249,125 in Orange County | A jumbo loan or a non QM loan; compare both |
If you are buying near the top of the conforming range, our guide to high balance and jumbo loans explains where the Orange County line falls.
How can you prepare for a mortgage when you are self employed?
- Plan your write offs with your tax professional. Talk about the income you will need to show in the two years before you buy, not just the tax you will save.
- File your returns on time. Lenders qualify you on filed returns, and an extension can leave your most recent year out of the picture.
- Separate business and personal money. One business account for business income and expenses makes both your returns and your bank statements cleaner.
- Keep deposits traceable. Large transfers or cash deposits without a paper trail slow down any file.
- Have current numbers ready. A year to date profit and loss statement, your business license and proof of your ownership share help answer common underwriting questions.
- Get preapproved before you shop. Compare a tax return loan and a bank statement loan on the same price, using official Loan Estimates.
Frequently asked questions
How many years of tax returns do you need for a mortgage when you are self employed?
Usually two years of personal and business returns. Fannie Mae can accept one year once you have owned the business for at least five years, and bank statement programs use 12 or 24 months of statements instead of returns.
Can you get a mortgage if you have been self employed for less than two years?
Often, yes, if your latest tax return shows at least a full year of self employment and you worked in the same field before. FHA requires at least two years of prior work in the same or a related line of work when you have been self employed between one and two years.
Do lenders use gross or net income for self employed borrowers?
Net income. Conventional and FHA loans start from the net income on your tax returns, after deductions, and add back items such as depreciation. Bank statement loans start from your deposits and subtract an expense factor.
What is a bank statement loan?
A non QM mortgage that qualifies self employed borrowers on 12 or 24 months of bank deposits instead of tax returns. It usually needs a larger down payment and carries a higher rate than a conventional loan.
Can you get an FHA loan if you are self employed?
Yes. FHA generally requires two years of self employment and two years of personal tax returns, plus business returns in most cases, and it qualifies you on the lower of your two year average income and your most recent year.
Jon Shrum
President of KMC Financial and leader of Team Shrum, powered by ARBOR Financial Group. Helping Orange County homebuyers and homeowners buy, refinance and plan their next move.
NMLS #335447
Based in Huntington Beach, serving California
Self employed and ready to buy?
See what your income qualifies for, two ways.
Jon Shrum and Team Shrum can review your tax returns and bank statements side by side, show the loan amount each path supports and compare the payment and cash to close for each.
Sources and official resources
- Fannie Mae Selling Guide: Self employed borrower documentation
- Fannie Mae Selling Guide: Income reported on Schedule C
- Freddie Mac Guide: Section 5304.1, self employed income
- HUD: Single Family Housing Policy Handbook 4000.1
- eCFR: Ability to repay and prepayment penalties, 12 CFR 1026.43
- CFPB: What is a qualified mortgage?
- CFPB: Loan Estimate explainer
- FHFA: Conforming loan limit values for 2026
- IRS: Self employed individuals tax center
Information checked September 28, 2026. Rates, loan limits, program rules and assistance funding change, so confirm current terms before you rely on them.
This article is for general education only and is not a loan offer, commitment to lend, or tax or legal advice. Rates, terms, fees and programs vary by lender and are subject to change without notice. All loans are subject to credit approval, underwriting guidelines and property eligibility. Examples are illustrations, not quotes. Team Shrum, KMC Financial and ARBOR Financial Group are not affiliated with any government agency. Jon Shrum, NMLS #335447. KMC Financial is powered by ARBOR Financial Group. ARBOR Financial Group is a DBA of The Turnkey Foundation Inc., NMLS #236669 (NMLS Consumer Access). Equal Housing Opportunity.
