What documents do self-employed borrowers need, and how is my income calculated?

What documents will I need?

For a conventional, FHA, or VA loan:

• Two years of personal tax returns, all schedules
• Two years of business tax returns if you own 25% or more of a partnership or corporation
• A year-to-date profit and loss statement
• Two months of bank statements for your down payment and reserves
• Proof the business is active, like a business license or a letter from your CPA

For a Non-QM bank statement loan:

• 12 or 24 months of bank statements (personal or business)
• Proof of self-employment for about two years
• Usually no tax returns

How is my income calculated?

On a regular loan, lenders start with your net business income (for a sole proprietor, the bottom line of Schedule C), then:

• Add back certain non-cash expenses, like depreciation and depletion
• Average the last two years
• Look at the trend: if this year is lower than last year, they may use the lower number

On a bank statement loan, income is usually your average monthly deposits multiplied by an expense factor, either a standard percentage or one your CPA provides.

What can trip me up?

• Income that dropped from one year to the next
• Mixing personal and business money in the same account
• Big, unexplained deposits that need a paper trail
• Filing taxes late or on extension without the returns ready

Example scenario (illustrative)

A photographer in Fort Collins shows $58,000 of net income on her Schedule C, plus $9,000 of depreciation on her equipment. Adding the depreciation back and averaging with the prior year, her qualifying income comes out closer to $64,000, enough to qualify for the home she wants.

Our take

Send me your last two years of returns before you start shopping. Ten minutes of review can tell you exactly what you qualify for, and whether a bank statement loan would do better.