How to get a mortgage if you’re newly self-employed

August 12, 2022 - 8 min read

Can you get a mortgage with just one year of tax returns?

One of the challenges of self-employment is getting a mortgage — especially when you’ve been self-employed for less than two years. Lenders typically want to see at least a two-year history of tax returns to verify that your self-employment income is stable and reliable.

Fortunately, some borrowers can use just one year of tax returns to qualify for a mortgage. But there are special rules to be aware of. Here’s what you should know.

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Getting approved as a self-employed home buyer

Lenders usually rely on W2s or pay stubs from an employer to measure a borrower’s income. A self-employed person won’t usually have these types of documents.

So lenders turn to personal tax returns to see how much a self-employed borrower has earned in the past two years. In some cases, lenders may need to see business tax returns.

How lenders evaluate self-employment income:

  • The stability of the self-employed borrower’s income
  • The location and nature of the borrower’s business
  • The demand for the product or service
  • The financial strength of the business
  • The future outlook of the business

When mortgage lenders see a two-year history of self-employment income in the same industry, they’re more likely to approve the income and the home loan. From their point of view, two full years is a good indicator of your earning power for at least the next three years.

But what if you’re new to self-employment and have only one year of tax returns? Can you get approved for a new home loan?

Check your home loan eligibility. Start here

When can you get approved with just one year of self-employment?

It is possible to get approved for a loan with only one year of self-employment history, but not everyone in this situation can qualify.

Specifically, if you worked in the same field and earned a comparable income before becoming self-employed, it may be easier to get your application approved with less than two years of self-employment history.

The following two scenarios illustrate important differences between two self-employed borrowers. Because of their lines of work, one borrower would need two years’ experience running their own business; the other might only need one.

Case study 1: When you needs two years of self-employment

This applicant has been self-employed as an insurance broker for one year. He has done well, making over $100,000 in his first year in the business.

Prior to getting into the insurance sales business he was a successful grocery store general manager. In his previous role he made $90,000 annually for many years.

In this case, the underwriter can’t approve the mortgage because the two industries are not related. A grocery management role is not similar enough to that of an insurance broker.

The applicant is off to a good start, but his income is still viewed as “unstable.” Next year, after two consecutive, successful years as an insurance broker, the applicant is far more likely to get approved.

Case study 2: When you can apply with only one year’s experience

This borrower has owned her own web design business for 14 months. Her most recent tax return shows she made $80,000 in net profit in her first year of business.

Prior to going off on her own, she worked for a large online marketing firm as a web development team leader for several years. She climbed the corporate ladder and averaged $70,000 a year before she left the company and became self-employed.

This type of scenario demonstrates career stability and would likely be approved, assuming the applicant supplied the right documentation, such as a tax return and year-to-date profit and loss statement.

Other ways to get a mortgage approved with one year of self-employment

Self-employed home buyers without two consecutive years of self-employment tax returns can simply wait it out. Next year, when they have two years of tax returns to show, they can fill out another loan application.

Or, self-employed home buyers who want to become homeowners right away — without waiting another year —- can consider these mortgage loan alternatives.

Non-QM mortgage loans

Non-QM mortgage loans don’t fit a specific loan program. They’re not conventional loans, and they’re also not government-insured mortgages like USDA, VA, or FHA loans.

Since non-QM lenders don’t have to follow any agency guidelines, they can make their own rules. As a result, you may be able to find a non-QM loan that allows only one year of self-employment income.

In exchange for this flexibility, expect to pay higher interest rates. You’ll also need to make a larger down payment and meet higher credit score requirements. Keep in mind you may be able to refinance to a lower rate later, once you can qualify for more traditional financing.

If you’re interested in this kind of loan, check with your local banks and credit unions first.

Bank statement loans

Some mortgage lenders will check your bank statements to see your recent cash flow. That cash flow, combined with other proof of ongoing business income, could bolster your personal finances in the eyes of a lender.

Like other non-QM loans, a bank statement loan could require a bigger down payment, a stronger credit history, and a lower debt-to-income ratio (DTI). A higher mortgage rate is also likely.

Co-borrowing or co-signing

If you’re not doing so already, you could add a co-borrower to your loan application. Your co-borrower’s income could provide the stability lenders are looking for, boosting your chances of approval.

Co-borrowers will share the debt and the responsibility of homeownership.They typically live with you in the new home.

A co-signer or “non-occupant co-borrower” could also strengthen your loan application without becoming a co-owner of the home. The co-singer would agree to take responsibility for the debt if you didn’t make your mortgage payments, which is a pretty big ask.

If you use a co-signer, you may want to refinance into a new loan, removing the co-signer from the mortgage, when you have two years of income tax returns to show a lender.

Ask your loan officer

Loan officers know the ins and outs of qualifying for a mortgage loan. A loan officer can help you compare different strategies, directing you to the self-employment mortgage that best suits your unique needs.

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Self-employment is only one variable for home buyers

Whether you’ve been self-employed for one year, three years, or for decades, the source of your monthly income is only one piece of your mortgage qualifying puzzle. Lenders also look at these factors:

  • Credit score: Minimum scores will vary by type of mortgage, ranging from 580 to 680. With some lenders, self-employed borrowers may need to exceed typical credit score minimums
  • Monthly debts: Monthly debts, such as car loans or credit card minimum payments, limit what you can spend on a mortgage payment. Lenders will size your loan accordingly
  • The home’s value: Lenders base maximum loan sizes on the value of the home you’re buying. They can’t extend more credit than the real estate is worth
  • Down payment size: USDA and VA loans won’t require a down payment, but conventional and FHA loans do. It’s possible to buy with as little as 3% down (or 3.5% down for FHA loans)

When you’re self-employed, you can increase your eligibility by becoming a stronger applicant in these other areas of your personal finances.

Making a larger-than-required down payment, paying off personal debts, and making sure you have excellent credit (or at least good credit) can help a lot. It will also help if you have extra money in the bank, beyond what you need for your down payment and closing costs.

Tax write-offs can be a challenge for self-employed home buyers

Self-employed people don’t get income taxes deducted from their regular pay, so they have to pay annual income taxes out of pocket to the IRS. To lower their taxable income, most self-employed people write off their business expenses — or they hire a CPA to keep track of these details and file Schedule C or other tax forms.

The trouble is, mortgage lenders look at net income after these tax deductions. If you earned $150,000 but wrote off $50,000 in business expenses, most lenders would document your earnings as $100,000. This means you get approved for a smaller loan than you could, in reality, afford.

A bank statement loan may help with this by showing your monthly cash flow. But, as mentioned above, bank statement loan interest rates are typically higher than rates on standard mortgage programs.

Types of self-employed mortgages

Aside from non-QM “bank statement loans,” shoppers won’t find loan programs designed specifically for self-employed home buyers.

Instead, self-employed individuals — which can include small business owners as well as freelancers, gig workers, and independent contractors — have the same loan choices as other home buyers:

  • Conventional loans: Freddie Mac and Fannie Mae, the two huge government-sponsored enterprises, set guidelines for these loans, the most popular type of mortgage
  • FHA loans: The Federal Housing Administration insures FHA loans, making them more attractive to private lenders even when borrowers have weaker credit reports and higher monthly debts
  • USDA or VA loans: These specialized products help military borrowers (VA loans) and moderate-income, rural home buyers (USDA loans)
  • Jumbo loans: These offer loan amounts above the conforming loan limit, which is currently $ for a single-family home in most parts of the U.S.

The only thing that makes these loans different for self-employed borrowers is the way an underwriter documents your income.

Different loan types have different self-employment requirements

Each type of mortgage has different rules for documenting self-employment income. FHA lenders, for example, may need to see your business license, business receipts, or evidence of invoices and contracts.

All of the major loan types want to see two years of self-employment income. Conventional, FHA, and VA loans can make an exception when you have only one year’s tax return but also at least two prior years working in the same profession.

Borrowers with one year or less of self-employment income — and who also worked in a different profession before becoming self-employed — will have a harder time getting mortgage approved.

Non-QM loans, which do not conform to any government guidelines, could approve some borrowers who have been self-employed only for the most recent year.

But keep in mind that, along with higher rates and higher eligibility criteria, non-QM loans don’t offer all the consumer protections modern home buyers are accustomed to. For example, a non-QM loan could have prepayment penalties.

Do I have to report self-employment income?

Lenders care about self-employment income only when it’s used to support a mortgage application. The same goes for income from Social Security or other disability benefits.

So if you’re self-employed on the side but also work a full-time, salaried job, you don’t have to report your self-employment income. You could document only the income from your employer.

However, your loan size would be based only on your qualifying income from your employer. For example, if you earn $65,000 a year teaching high school and $15,000 from your side hustles, your loan size would be based only on the $65,000 salary from your school.

If you need your self-employment income to qualify for a mortgage, you’ll have to follow your lender’s rules about documenting the income.

What are today’s rates?

Average mortgage rates have increased from the historic lows seen in recent years. But rates still change from day to day and week to week.

Along with market forces, your rate — and your monthly payments — will depend on your unique credit profile and the amount of income you earn.

To see where you stand, apply for a mortgage preapproval.

Time to make a move? Let us find the right mortgage for you

Adam Lesner
Authored By: Adam Lesner
The Mortgage Reports contributor
Adam Lesner is a Michigan-area mortgage banker specializing in portfolio loan and unique-scenario lending. He has originated home loans since 2008 and has helped clients across the U.S.