You worked hard and made the Leap. You left a secure position, expanded your business, and, at long last, you’re making a good living. Now you want to buy a home, but will your non-traditional history keep you from qualifying? The answer depends on the type of loan.
A two-year self-employment history is the industry standard for many mortgage programs, but there are ways to qualify with a shorter track record. Here’s a breakdown of the major loan options and how to get started.
Two Years Is the Target, Not a Dealbreaker
Most lenders require a two-year history of self-employment income. Fannie Mae generally looks for two years of documentation to establish that a borrower’s income is stable and likely to continue, although exceptions may apply. Still, if you have been self-employed for 12 to 23 months, there may be an option. FHA may consider borrowers with less than two years of self-employment history if they previously worked in the same or a related field for at least two years. If you’re self-employed, ask your loan officer how much business history you need to qualify.
What lenders really care about is what your paperwork shows.
What Are Your Chances for Self-Employed Approval?
While there’s no single approval rate for self-employed borrowers, there’s no shortage of good news: the number of denials isn’t large, and friction rates increase with each step in the approval process. In 2024, about 15 out of 100 home purchase applicants were turned down, according to the St. Louis Federal Reserve. For the self-employed, Griffin Funding’s analysis of Federal Housing Finance Agency/Consumer Financial Protection Bureau survey data found:
- More hang-ups: 21.4% of self-employed buyers vs. 14.5% of wage earners
- More document requests: 73.2% vs. 67.7%
- More co-borrowers: 13.5% vs. 9.7%
The figures only include borrowers who purchased homes, so they do not represent mortgage denial rates. Meanwhile, non-QM loan options, such as bank statement loans, continue to provide alternative ways for small-business owners to qualify. When one lender cannot approve a loan, another may offer more flexible qualification requirements.
Why Your Past Work Experience Matters
For underwriters, the key question is whether your income is likely to continue. A salaried employee has pay stubs and an employer who can verify their employment. However, business income can fluctuate due to client demand, seasonality, and economic conditions. Tax deductions, such as depreciation and amortization, can also make it harder to assess a business’s actual cash flow. Underwriters look for a consistent pattern: Is your income increasing, remaining stable, or declining? A downward trend can limit the loan amount you qualify for or require additional underwriting review.
A business owner with at least two years’ history and a 25 percent or greater share of the business’s stock, who has just filed his or her two-year federal tax returns, has a good shot at a Fannie Mae-approved mortgage. A self-employed hire who has recently left his or her salaried job, or a sole proprietor with no ownership stake, will be more challenging.
Fannie Mae and Freddie Mac Conventional Loan
Conventional mortgages are the most common, and their self-employment rules are the most precise.
- Two years is normal. Most lenders will want to see 24 months of personal and business income tax documents.
- One year can work. Lenders will consider less than 24 months if a borrower has just opened his or her business, but the individual tax returns must show a full 12 months of positive income from that business.
- Less than a year is OK. If the individual also owns 25 percent or more of a related business, one year’s worth of personal and business tax documents may be accepted, and Freddie Mac’s automated underwriting engine can consider ownership of fewer than five years.
- Your ownership stake determines the label. Individuals who own less than 25 percent of the business are generally considered wage earners, even if they work for themselves. Owning 25 percent or more of a business defines your self-employed status.
FHA Income Guidelines
An FHA loan is known for low down payment and relaxed credit standards, but FHA’s self-employment rules are strict. The Department of Housing and Urban Development’s handbook, 4000.1, requires at least two years of self-employment to qualify. If you have been in business between one and two years, you can qualify if you have previously been employed in the same industry, or a similar one, for at least two years.
FHA expects the individual income from the last two years to average out to at least one year of the previous year’s earned income. If your net income drops 20 percent or more year-over-year, the case shifts to manual underwriting.
An experienced plumber who branched out on her own after working as a plumber on a remodeling job for five years has a good 14-month case. A recent newcomer to HVAC who worked for a company for two years and then leased his own truck won’t.
Also Read: How Do I Qualify For an FHA Mortgage?
VA and USDA Income Guidelines
The Department of Veterans Affairs and the Department of Agriculture usually expect self-employment to be two years, and individual lenders add overlays. Speak with your loan officer early to know how many months your trade is likely to count.
Bank Statement Loans: A Different Route to Approval
If your tax returns don’t accurately reflect your business’s cash flow, or your business is newer than traditional lending guidelines typically allow, you might consider a bank statement loan instead. This non-QM loan option uses 12 to 24 months of business or personal bank statements instead of tax returns to calculate qualifying income based on eligible deposits. Business deposits may be subject to an expense factor of around 50%, while personal deposits may be evaluated differently, depending on the lender and loan program.
The challenge is that almost all bank statement programs still want two years of self-employment experience, though some will consider one if everything else is strong, such as a 720 credit score, a large down payment and documented cash reserves, a CPA’s letter and a clean business license. Expect a credit score of 660 or more, a down payment of 10 to 25 percent, and reserves to be more important than years of experience.
“A Reliance Financial client, a self-employed gas station owner, saved $13,810 a year with a jumbo buy refi based on 12 months of bank statements. Our analysis of the program showed that a 20 percent expense factor is typical when the lender sets the business side of the statement, while a higher reward for the personal side helps him qualify.”
Does Your Previous Employment Count?
Sometimes. FHA looks at previous employment in the same industry, and some lenders may do the same. Switching from a W-2 to self-employment in the same field may also matter, and some non-QM lenders use the date that you first started paying yourself as the start date. Since the rules differ among products, ask how many months of work history an agency will recognize.
How to Make Your Application Better?
- Talk to your CPA before you file. Tax minimization strategies can reduce your qualifying income. If you need to qualify within the next one to two years, consider your options carefully.
- Keep separate business and personal bank accounts. Doing so can simplify a lender’s paperwork.
- Accumulate documentation. Having a current business license, a year-to-date profit and loss statement, and a letter from your CPA will help, as will a statement verifying the business is still in operation and solvent shortly before you close.
- Hold onto your credit. Strong scores and low debt could offset a short history.
- Watch your income. A downward trend can prevent you from qualifying, no matter how many months your business has been open.
- Talk to an expert early. A pre-approval conversation can reveal how you can best qualify now and the months needed before you can use a different, often better, option.
How Can Reliance Financial Help?
Every business owner’s financial situation is different, so a denial from one lender doesn’t mean you’re out of options. As a California mortgage broker, Reliance Financial compares loan options from multiple lenders and helps you determine whether you’re ready to buy now or need more time to prepare. Get a free, customized rate quote or speak with our team about your circumstances.
FAQs
1. How many self-employed buyers get a mortgage?
No official rate is published. Federal survey data says most do, but 21.4% of self-employed buyers who shopped multiple lenders reported an earlier turn-down, versus 14.5% of wage earners.
2. How much self-employment history do I need?
Two years is the norm, although 12 months can suffice if you show a full year of income on tax returns for your current business.
3. Why are self-employed borrower declines higher?
Lenders use net income, require more paperwork, and also measure debt levels more closely. Acceptable income can be 50% or less of your DTI, so a higher qualifying rate can result in a denied application.
4. Can I get a mortgage without tax returns?
Sure. Bank statement loans work on 12-24 months of deposits. Some programs require two years of self-employment, and most require bigger down payments and higher interest rates.
5. What documentation will I need?
Plans for self-employed borrowers include two years of personal and business tax returns, a business license, a business CPA letter (sometimes), business bank statements, and a current profit & loss statement (P&L).
6. Will a co-signer help?
It might. 13.5% of self-employed borrowers in the survey used a co-signer, compared to 9.7% of wage earners. Their income and credit can help offset a lower self-employment income.
7. Do tax deductions hurt my chances?
Potentially. Deductions lower your net income that lenders can use to qualify. If you plan to buy in 12-24 months, your CPA can advise on balancing tax reduction against qualifying income.
8. How can I qualify?
Reduce your DTI, keep finances separate for business and personal use, start gathering documents early, and shop with a mortgage broker who compares many lenders.
