Being Your Own Boss Shouldn't Stop You from Owning a Home
If you're self-employed, you already know that tax time looks different for you. And unfortunately, the same strategies that help you minimize taxes can make it harder to qualify for a mortgage. But getting approved as a self-employed borrower is absolutely possible — you just need the right preparation and the right lender.
At The Taberne Group, we work with self-employed borrowers across PA and NJ every day. Here's what you need to know.
Why Is It Harder for Self-Employed Borrowers?
Lenders need to verify stable, ongoing income. For W-2 employees, this is simple — pay stubs and W-2s tell the story. For self-employed borrowers, income verification is more complex because:
What Lenders Look At
1. Two Years of Tax Returns
This is the most critical requirement. Lenders will request your complete federal tax returns (all pages, all schedules) for the most recent two years. They calculate your income using specific IRS forms:
2. Year-to-Date Financials
Most lenders will ask for a profit and loss statement (P&L) for the current year. Some may also request a balance sheet. These don't need to be audited — a CPA-prepared statement is sufficient.
3. Business Bank Statements
Expect to provide 2-3 months of business bank statements to verify that your business is still operating and generating revenue.
4. Business Verification
Lenders will verify your business exists through one or more methods:
How to Calculate Your Qualifying Income
Here's a simplified example of how lenders calculate self-employed income:
Year 1 (2024) Schedule C:
Year 2 (2025) Schedule C:
Average qualifying income: ($128,000 + $148,000) / 2 = $138,000/year or $11,500/month
Important Add-Backs
Lenders add back certain non-cash expenses to your income:
These add-backs can significantly increase your qualifying income.
Strategies to Strengthen Your Application
1. Plan Your Taxes Strategically
If you're planning to buy a home in the next 1-2 years, talk to your CPA about balancing tax savings with mortgage qualification. Taking fewer deductions for one year can substantially increase your qualifying income.
2. Keep Business and Personal Finances Separate
Lenders want to see clear separation between business and personal accounts. Mixing them creates red flags and makes underwriting more difficult.
3. Maintain Consistent or Growing Income
If your income dropped significantly from one year to the next, lenders will use the lower number or average. Showing year-over-year growth strengthens your application.
4. Minimize New Debt
Avoid taking on new business or personal debt before applying. Every dollar of monthly debt reduces your buying power.
5. Build Cash Reserves
Having 3-6 months of mortgage payments in savings (in addition to your down payment and closing costs) makes you a stronger borrower.
Bank Statement Loans — An Alternative
If your tax returns don't reflect your true earning capacity, bank statement loan programs may be an option. These programs use 12-24 months of bank deposits instead of tax returns to calculate income. Key features:
Common Mistakes Self-Employed Borrowers Make
1. Applying too soon after starting a business — Most lenders require 2 years of self-employment history
2. Not providing complete tax returns — Every page and schedule matters
3. Forgetting about business debt — Business loans in your name count against your DTI
4. Changing business structure mid-application — Don't switch from LLC to S-Corp while applying
5. Making large business purchases before closing — This can change your financial profile
Ready to Get Pre-Approved?
Self-employed borrowers need a lender who understands the nuances of non-traditional income. The Taberne Group specializes in working with entrepreneurs, freelancers, and small business owners across PA and NJ. Call us at (215) 266-0663 or start your application at movement.com. We'll find the right loan program for your situation.