Mortgages for the self-employed
If you are self-employed, you already know about the “life tax” that never shows up on your Form 1040. You carry the risk, you carry the responsibility, and then when you try to buy a home or an investment property, it can feel like the mortgage world is stacked against you.
I hear the same story over and over.
“I skipped deductions for a few years and paid an extra five thousand to twenty thousand of tax each year so I could qualify for a mortgage.”
That is not smart tax planning. It is also usually not necessary.
This edition of The Informed Taxpayer is all about how lenders actually look at self-employed borrowers, why your tax return is not the whole story, and how to build the right team so you can qualify for financing without sabotaging your tax strategy.
Myth one
Lenders only care about your AGI
Many self-employed taxpayers assume the lender focuses on the Adjusted Gross Income line on the tax return. So they keep income high on paper and leave legal deductions on the table just to look better to a bank.
In reality, many lenders do not care about AGI at all. They go straight to the business schedules and drill into the details.
Examples
• For a self-employed Schedule C or Schedule F filer, they often start with net profit, then add back non-cash expenses like depreciation. That can turn what looks like a loss into positive qualifying income.
• With S corporations and partnerships owned by a self-employed taxpayer, they may look at K 1 income, reasonable add backs, and your ownership percentage to get to a more accurate number than AGI.
The point, your “qualifying income” for lending can be very different from the number you see on the AGI line. If you are self-employed, do not assume you need to overpay tax to get a loan.
Myth two
You must have two full years of self-employed returns
Another common belief in the self-employed world is that you need two full years of self-employed tax returns before anyone will touch your file. There are situations where that is true, especially with strict conventional guidelines.
But there are also programs that allow
• One year of returns if you have a longer track record in the same line of work • Non QM loans that look at contracts, work history, and the structure of your new self-employed role
A classic example is a long time W-2 professional who is pushed or pulled into a contractor role with a 1099. On paper, that person becomes self-employed overnight, but the risk profile has not really changed. With the right lender and the right program, that can often be documented and approved without waiting years.
Beyond tax returns
Bank statement and 1099 loans
For many self-employed business owners, traditional underwriting just does not capture the real story. That is where non QM options can be powerful tools.
Two common examples
Bank statement loans Instead of asking for your tax return, the lender reviews twelve months of business bank statements. They total the deposits, back out obvious transfers, then apply a standard expense factor to estimate your true income as a self-employed person.
If your tax return shows a tiny profit after aggressive deductions, but your business bank account shows consistent strong deposits, this can be a game changer for a self-employed borrower.
1099 loans If you are self-employed and paid on a 1099, some programs will take your 1099 income, apply a conservative expense haircut, and use the rest as qualifying income with no tax return required.
For self-employed real estate agents, sales professionals, and others who live in the 1099 world, this can be much more realistic than forcing everything through a traditional W2 style lens.
None of this means the lender is being lax. They still care about risk. They are just using tools that actually fit how self-employed people earn a living.
DSCR loans and investment property strategy
If you are a self-employed investor in long term rentals or short term rentals, you may also hear about DSCR loans. DSCR stands for Debt Service Coverage Ratio. Instead of focusing on your personal income, these loans focus on whether the projected rents from the property can cover the mortgage payment.
Used correctly, DSCR loans can help a self-employed investor grow a portfolio when personal income alone would hold them back. Used recklessly, they can trap you in high rates and stiff prepayment penalties that limit your flexibility.
Big takeaways for self-employed investors
• DSCR can be a Plan B or Plan C, not always Plan A
• Be very cautious with three to five year prepayment penalties
• Be honest about your own strategy before you lock yourself in
There are also products that let you qualify based on a trailing twelve month gross rent history across your properties, which can be a better reflection of a mature self-employed rental business than a single recent tax year.
Why your team matters more than the program name
Here is the hard truth. The average local lender, and the average tax preparer, are simply not equipped to navigate all of these options for a complex self-employed client.
You need
• A tax planner who will not gut your deductions just to make a lender happy • A lender who actually understands self-employed underwriting and investor products • Both of them talking to each other before you file and before you write an offer
Too many self-employed buyers start the conversation with a random bank after they have already filed two years of “mortgage friendly” returns that cost them tens of thousands of dollars in extra tax. At that point, your options are limited.
When you plan ahead, your mortgage strategy and your tax strategy can work together instead of against each other.
Action steps for the informed self-employed taxpayer
If you are self-employed and thinking about buying a home or an investment property in the next one to three years, here is what I recommend
Self-employment already comes with enough “life tax.” Do not add another layer by misunderstanding how mortgages really work for self-employed business owners and independent professionals.
If you want to go deeper into this topic, check out Episode 161 of the Teaching Tax Flow: The Podcast , Mortgages for the Self-Employed, where we dig into real world scenarios with mortgage expert and investor Parker Borofsky .
As always, this newsletter is for education only. Work with your own CPA, lender, and legal team before you make decisions.
Stay proactive, stay informed, and keep more of what you earn.