Best Mortgage Options for Self-Employed Borrowers

The best mortgage options for self-employed borrowers usually include bank statement loans, 1099 loans, profit and loss statement loans, no-income verification loans, and bank statement second mortgages. The right fit depends on how you earn income, how consistently it shows up in your records, and whether you are buying a home or tapping equity.

This guide compares how each option works, who it tends to fit best, what documents lenders commonly review, and when a traditional mortgage may still be the better choice.

1. Bank Statement Mortgages

Arguably one of the most popular mortgage options for self-employed individuals is the bank statement mortgage loan.

These loans have been tailored specifically to address the unique circumstances of self-employed individuals who may not qualify for traditional mortgage financing.

Unlike conventional loans that rely on standard income documents like W-2s or tax returns, these loans allow lenders to gauge your financial stability through, well, your bank statements.

By analyzing the cash flow through your accounts over a specific amount of time, lenders can assess your capacity to repay the loan. This offers a more accurate reflection of your financial status, particularly if your income is irregular or you frequently make use of tax season write-offs.

While requirements may vary from lender to lender, typically, you'll need:

• 12 to 24 months of either personal or business bank statements

• A minimum score of 660 is often considered a baseline

• A debt-to-income ratio (DTI) of 50% or less.

• A down payment of around 10-20% (depending on your financial health)

• Two months' worth of personal asset statements to verify your liquid assets

• Business owners will need a letter from a certified CPA verifying their ownership stake, business duration, and its active and good standing status.

For more information about bank statement loans, check out this article.

2. Profit & Loss Statement Mortgages

Profit and loss (P&L) statement mortgage loans are another excellent choice for self-employed individuals. Instead of using tax returns or W2s, these loans leverage P&L statements as the primary documents for verifying income.

A P&L statement, generally prepared by a certified public accountant (CPA), provides a comprehensive overview of a business's revenue, costs, and expenses over a specified period (usually one year).

This is particularly beneficial for individuals who maintain substantial business expenses that may decrease their net income on tax returns. The potential downside is the need for meticulous bookkeeping and a reputable accountant to prepare the statement.

To obtain one of these loans, you'll need:

• A 12 to 24-month P&L statement certified by a CPA

• A credit score of at least 620

• A DTI between 45-50%

• A down payment of 10% to 20%, depending on your specific financial situation

• Two months' worth of personal asset statements to ensure you can handle unexpected debts during the loan term

You can find more information about P&L statement mortgages here.

3. No-income Verification Mortgage Loans

No-income verification mortgage loans are truly a unique product that forgoes the need for traditional income documentation and, instead, relies on a borrower's creditworthiness and assets to qualify them for a mortgage.

To do this, lenders will evaluate aspects of a potential borrower's financial profile, including:

• Credit score

• Bank statements

• Investment accounts

• Home equity

This flexibility makes no-income verification mortgage loans an appealing option for those with non-traditional income sources.

Since you won't be relying on traditional documentation to prove your ability to repay the loan, these loans tend to come with stricter requirements, such as:

• A credit score of 700+ is generally ideal, though some lenders may accept scores as low as 640

• Proof of substantial assets that could serve as collateral

• A larger down payment, typically between 20-35%

To learn more about no-income verification mortgage loans, read this.

4. 1099 Mortgage Loans

Unlike the other self-employed mortgage options on this list, 1099 mortgage loans are designed specifically for independent contractors or freelancers with income reported on a 1099 form instead of a W2.

Loans like this don't require tax returns for income verification; instead, they use 1099 forms, making them a great option for those who like to take advantage of tax write-offs.

However, it's essential to note that income for these loans must be paid directly to the individual, not to an LLC or other business entity.

Lenders typically use 1099s from a single employer, using 90% of the total declared income to determine borrowing capacity. It's also possible to combine multiple 1099s from different clients or employers as long as the income has been consistent over a given time.

To qualify for a 1099 mortgage loan, you usually need to fulfill these requirements:

• Have consistent 1099 income from the same sources for at least the past two years

• A credit score of at least 660 (typical baseline)

• Prepare a year-to-date earnings statement from your employer/who you’re contracted by

• A down payment between 10-20%

If you think this type of loan might be your best option, be sure to check out this article.

5. Bank Statement Second Mortgages

For those looking to tap into your home's equity to make a large purchase or reinvest in another property, a bank statement or second mortgage loan may be the right option for you.

Like bank statement loans, these second mortgages evaluate bank statements to ascertain your income rather than tax returns.

The key advantage is that you may leverage your home's equity without showing traditional income proof and without having to refinance your first mortgage.

It's important to note that these loans are typically second-lien products and should be considered carefully due to their specific terms and potential interest rates. Maximum loan amounts vary by lender, so confirm current limits directly with your loan officer.

To obtain one of these loans, you typically need to have:

• At least 12-24 months of personal or business bank statements to verify income

• A minimum credit score of 660

• A combined loan-to-value ratio of 85%

• A DTI of less than 50%

• Documentation of personal assets (typically for at least two months)

• A certified CPA letter for business owners (same as for traditional bank statement loans)

If you would like more information about these types of loans, reach out to one of our experts.

Comparing the Different Loan Options

Here's a quick comparison of these mortgage options:

Please note that these are lender-specific examples, not universal mortgage rules. Qualification standards for non-QM and alternative documentation loans vary by lender, investor, occupancy, and property type. For baseline documentation standards on conventional mortgages, see the current Fannie Mae and Freddie Mac selling guides, which explain how self-employment income is analyzed when a borrower uses traditional agency financing.

Tips for Improving Your Odds of Obtaining a Self-Employed Mortgage Loan

Securing a self-employed mortgage loan might seem daunting due to the unique income situations, but with careful preparation and some strategic moves, you can improve your odds considerably. Here are some key steps:

Maintain Comprehensive Financial Records

Your financial records are key to securing a mortgage when you're self-employed. Be diligent about maintaining detailed records of your income and expenses.

Ensure your bank statements, 1099s, and profit & loss statements are thorough and up-to-date, presenting lenders with a clear picture of your financial situation. To help you get ready for qualification, we recommend that you:

• Find and work with a certified accountant

• Update your records frequently

• Prepare all your documents before you speak to your lender

Boost Your Credit Score

Your credit scores will play a significant role in determining your overall rates and terms for your mortgage. A high credit score significantly enhances your appeal to lenders. Here are some strategies to improve it:

• Always pay your bills on time.

• Reduce your credit card balances, if not pay them off completely.

• Maintain a low credit utilization rate.

• Work with a credit repair specialist to remove any derogatory remarks from your credit report.

Build Up Liquid Assets

Since many of these loans require alternative documentation to prove your income, it's a good idea to build up your cash reserves so that you can use it to provide proof of your ability to repay the mortgage.

Here are some steps you can take to build your cash reserves:

• Make it a habit to set aside a portion of your income each month

• Opt for investments that can be easily liquidated without significant loss

• Avoid large deposits or withdrawals that will be difficult to explain

Work With an Experienced Lender

Given the unique aspects of self-employed income, working with a professional who understands your situation can be incredibly beneficial. They can:

• Offer personalized advice based on your financial situation.

• Guide you toward the most suitable mortgage products for your specific needs.

• Assist in preparing a solid application before submission to ensure it's strong and error-free.

Which Mortgage Option Is Best for Your Situation?

If you are trying to decide between these self-employed mortgage options, start with how your income is documented and what you are trying to do with the loan.

• Bank statement loan: Often the best fit when your tax returns understate income because of business write-offs, but your deposits show steady cash flow.

• 1099 loan: Usually a strong fit for independent contractors who are paid directly on 1099s and want qualification based on that income instead of tax returns.

• Profit and loss statement loan: May fit business owners with clean bookkeeping and CPA-prepared records that show stronger income than tax returns alone.

• No-income verification loan: Typically reserved for borrowers with substantial assets, stronger credit, and larger down payments who do not want to document income in the usual way.

• Bank statement second mortgage: Best for homeowners who want to access equity without refinancing their first mortgage and who need alternative income documentation.

In our experience, the best option is usually the one that matches the way your income actually flows, not the one with the fewest documents. A loan officer should review your business structure, deposit history, credit profile, reserves, occupancy, and property type before steering you toward one path.

Frequently Asked Questions

What is the best mortgage option for self-employed borrowers?

The best mortgage option for self-employed borrowers depends on how income is documented. Bank statement loans often fit borrowers with strong deposits and heavy tax write-offs, while 1099 loans may fit independent contractors paid directly on 1099s. If tax returns already show enough qualifying income, a conventional mortgage may still be the strongest option.

Can you get a mortgage without tax returns if you are self-employed?

Yes, some self-employed borrowers use alternative documentation instead of tax returns, such as bank statements, 1099s, or a CPA-prepared profit and loss statement. The tradeoff is that these loans often require stronger compensating factors, such as higher credit, more reserves, or a larger down payment.

How many years of self-employment do lenders want to see?

Many lenders want to see a history of self-employment and stable income, but the exact requirement depends on the loan type and underwriting guidelines. For conventional loans, current agency guidance should be checked in the latest Fannie Mae or Freddie Mac selling guide. Alternative documentation programs may have their own overlays.

Is a bank statement loan better than a 1099 loan?

A bank statement loan is often better when deposits show stronger income than tax returns, especially for business owners. A 1099 loan may be simpler for independent contractors who are paid directly as individuals and have consistent 1099 income. The better option is the one that documents your income most clearly with the least friction.

Talk Through Your Self-Employed Mortgage Options

At Modern Day Lending, we work with self-employed borrowers, business owners, and independent contractors whose income does not always fit standard agency documentation. We can review your file, explain which self-employed mortgage programs may fit, and help you prepare a cleaner application.

Reach out to one of our mortgage experts to talk through your options.