Can I Get a Conventional Loan If I Am Self-Employed?
Being self-employed does not disqualify you from a conventional loan — but it does add complexity to the documentation process. Here is exactly what lenders look for and how to position yourself for approval.
Who is considered self-employed?
Under Fannie Mae and Freddie Mac guidelines, any borrower with a 25% or greater ownership interest in a business is considered self-employed. This includes sole proprietors, LLC members, S-corporation shareholders, and partners in a partnership. Independent contractors who file a Schedule C are also treated as self-employed.
The two-year history requirement
Fannie Mae generally requires a two-year history of self-employment income to use it for qualifying — two years of personal tax returns and usually two years of business returns. However, a one-year exception is available when the business has been in existence for at least five consecutive years and the borrower has had 25% or more ownership for five or more years consecutively.
Freddie Mac and some lenders also allow a 12–24 month self-employment history when the borrower has a documented two-year prior income history in the same or similar occupation — for example, a physician who recently opened a private practice after working as a hospital employee.
Required documentation
- Two years of signed personal federal tax returns (all schedules)
- Two years of business tax returns (Form 1065, 1120S, or 1120 as applicable)
- Year-to-date profit and loss statement
- Signed IRS Form 4506-C authorizing tax transcript verification
- Business license or CPA letter confirming active business (in some cases)
How qualifying income is calculated
Lenders perform a cash flow analysis using IRS Form 1084 or equivalent. Non-cash expenses (depreciation, depletion, amortization) are added back to the net income shown on tax returns. Business losses must be deducted. If income is declining year over year, lenders must use the lower of the two years — or may flag income instability.
A worked example (illustrative example, not a quote)
Consider a sole proprietor whose returns show the following:
| Item | Year 1 | Year 2 |
|---|---|---|
| Net business income | $80,000 | $100,000 |
| Add back depreciation | $6,000 | $8,000 |
| Adjusted income | $86,000 | $108,000 |
With income that is stable or rising, the two years are generally averaged: ($86,000 + $108,000) ÷ 2 = $97,000, or about $8,083 a month. If Year 2 had come in lower than Year 1, the lender would look hard at the decline, and the usable number would likely fall below the average.
Preparing before you apply
- Meet with your CPA before filing, not after, if a home purchase is on your calendar.
- Keep business and personal funds in separate accounts, so deposits are easy to trace.
- If you plan to use business funds for the down payment, expect the lender to confirm the business can spare them.
- Pay down personal debts with business money only when documented; random transfers raise questions.
- Build a clean year-to-date profit and loss statement and keep it current.
Common mistakes
- Assuming a large one-time contract will count when it is not in the tax return history.
- Changing entity type or business name close to the application date.
- Leaving large, undocumented deposits in the accounts you plan to use.
Frequently asked questions
Is a profit and loss statement enough without tax returns?
Not for a conventional loan. Returns are the foundation, and the profit and loss statement supplements them. Programs that rely mainly on a profit and loss statement exist outside conventional, and terms vary by program and borrower profile.
Will the lender call my business?
Verification of the business, such as a license, a CPA letter, or a listing, is common in the file. It is a routine step, not a sign of a problem.
Does lower taxable income hurt the loan amount I qualify for?
Yes. Qualifying income comes from the return, so deductions that cut your tax bill also cut your borrowing power. Ask a tax professional how to balance both.
Related guides
- Bank statement loans for self-employed borrowers
- Profit and loss statement mortgages
- Debt-to-income limits
- Who qualifies for a conventional loan
Key takeaways
- 25% or more ownership in a business equals self-employed status under agency guidelines.
- Two years of personal and usually business tax returns are required.
- One-year exception available when the business has been operating for 5+ consecutive years.
- Income calculation adds back depreciation and amortization through a cash flow analysis.
- Declining income: lenders must use the lower of two years, which may reduce qualifying income.
- Heavy write-offs reduce qualifying income — review returns with a CPA before applying.
- Stable or rising income is generally averaged across two years after add-backs.
- Start the paperwork before you file your return; the net figure on the return is what counts.
- If tax returns understate your cash flow, a bank statement program may be worth comparing.
Ready to explore your conventional loan options? Lendia can walk you through what you qualify for and find the right program for your goals.