You can get a mortgage as a contractor. Lenders will approve self-employed borrowers who meet the same core requirements as W-2 applicants, but they ask for more paperwork and calculate your income differently. Most will want to see at least two years of self-employment history, and they’ll qualify you on your net profit after business deductions rather than your gross earnings. That single distinction is what surprises most contractors and drives almost every other quirk of the process.
The Two-Year History Rule
Lenders treat you as self-employed if you own 25% or more of a business or earn most of your income through 1099 contracts rather than a W-2. Fannie Mae and Freddie Mac both expect a two-year track record of self-employment income before they’ll consider your earnings stable enough for a long-term loan.1Fannie Mae. Selling Guide – Underwriting Factors and Documentation for a Self-Employed Borrower
Two exceptions matter. If you left a W-2 job to do the same work independently, a shorter history can work when you can document relevant education, training, and continuity in the same field. A salaried developer who becomes a freelance developer is the clean version of this story. Separately, if your business has been operating for at least five years and you’ve held 25% or more ownership that whole time, Fannie Mae allows lenders to use a single year of tax returns instead of two.1Fannie Mae. Selling Guide – Underwriting Factors and Documentation for a Self-Employed Borrower That’s useful if you had a weak year two years back and a strong one recently.
How Lenders Calculate Your Income
An underwriter doesn’t look at your gross revenue. They start with your net profit after all business deductions, meaning the bottom of your Schedule C or the income flowing through your K-1. Every deduction you took for equipment, home office costs, vehicle expenses, and travel reduces the income the lender will recognize.1Fannie Mae. Selling Guide – Underwriting Factors and Documentation for a Self-Employed Borrower The deductions that save you money on taxes work against you when you apply for a mortgage.
The standard method averages your net income over the past two years and divides by 24 to get a monthly figure. Earn $90,000 net in Year 1 and $110,000 net in Year 2, and the lender counts your monthly income as roughly $8,333. But if Year 2 is lower than Year 1, the underwriter may use only the lower year rather than the average. A steep downward trend can lead to denial unless you can document the reason: a one-time client loss, a planned transition, or an industry downturn that has since reversed.
There is one bright spot. Underwriters add back certain non-cash expenses that reduced your taxable income without pulling money out of your pocket. Depreciation is the most common, but amortization and depletion also qualify.2Fannie Mae. Cash Flow Analysis (Form 1084) If you claimed $15,000 in depreciation on equipment, that $15,000 gets added back to your qualifying income. Vehicle depreciation built into the standard mileage deduction can also be added back by multiplying your business miles by the IRS depreciation factor for that year. These add-backs apply across sole proprietorships, partnerships, S-corps, and regular corporations.
Documents to Gather
Missing or inconsistent documents are the most common reason self-employed applications stall. Start early and expect to produce all of the following.
- Complete federal personal tax returns for the past two years, with every schedule. Schedule C is the key document for sole proprietors; Schedule E covers rental or partnership income.1Fannie Mae. Selling Guide – Underwriting Factors and Documentation for a Self-Employed Borrower
- Business tax returns for the same two years if your business is an S-corporation (Form 1120-S) or partnership (Form 1065).3My Home by Freddie Mac. Qualifying for a Mortgage When You’re Self-Employed
- Copies of all 1099-NEC or 1099-MISC forms from your clients for the past two years.
- A year-to-date profit and loss statement that bridges your last tax filing to the present.3My Home by Freddie Mac. Qualifying for a Mortgage When You’re Self-Employed
- Three to six months of business bank statements. Underwriters cross-reference deposits against your reported earnings; mismatches raise flags.
- A signed IRS Form 4506-C, which authorizes the lender to pull your tax transcripts directly through the Income Verification Express Service to confirm your returns are genuine.4Internal Revenue Service. Income Verification Express Service (IVES)
Some lenders also ask for a letter from your CPA or tax preparer confirming your self-employment status, ownership percentage, and business health. It isn’t universally required, but having one ready speeds things up if the underwriter requests it.
Credit, DTI, and Down Payment
Fannie Mae eliminated its hard 620 minimum credit score for loans processed through its Desktop Underwriter system as of November 2025, replacing the bright-line cutoff with a broader review of your financial profile.5Fannie Mae. Selling Guide Announcement SEL-2025-09 In practice, individual lenders still set their own minimums, and 620 remains a common floor for conventional loans. FHA loans accept scores as low as 580 with a 3.5% down payment, or 500 with 10% down. A score of 740 or higher unlocks the best rates.
Your debt-to-income ratio (total monthly debt payments divided by gross monthly income) carries more weight for contractors because the income side is harder to pin down. Fannie Mae allows a DTI up to 50% for loans underwritten through Desktop Underwriter and 45% for manually underwritten loans.6Fannie Mae. Selling Guide – Debt-to-Income Ratios Staying below 43% gives you the most flexibility across lenders.
Minimum down payment requirements are the same as for W-2 borrowers: 3% for qualifying first-time conventional buyers, 5% for most others, and 3.5% for FHA loans with a credit score of 580 or higher. A larger down payment strengthens a complex application. Putting 10% or 20% down reduces the lender’s risk and can offset concerns about income variability.
Plan Your Taxes Before You Apply
If you plan to buy a home within the next year or two, tax strategy needs to account for it. Contractors who aggressively minimize taxable income (rational planning in a normal year) often undermine their own mortgage application. The underwriter doesn’t care that you actually took home $120,000; if your Schedule C shows $65,000 after deductions, you qualify on $65,000.
Start dialing back optional deductions at least two full tax years before you apply. That doesn’t mean skipping legitimate expenses. It means reconsidering elective ones: large equipment purchases you could defer, aggressive home office deductions, and heavy vehicle expense claims all eat into your qualifying income. Because lenders average two years of returns, one strong year paired with one weak year still dilutes the number they use.
Talk to your CPA about the tradeoff early. The tax cost of claiming fewer deductions for a year or two is usually smaller than the cost of qualifying for a smaller mortgage, or not qualifying at all.
Bank Statement Loans and Other Alternatives
If your tax returns don’t reflect your real earning power, non-qualified mortgage products offer a different route. These loans sit outside the Fannie Mae and Freddie Mac framework and rely on alternative income verification, but they come with tradeoffs.
Bank statement loans are the most common option for self-employed borrowers. Instead of tax returns, the lender reviews 12 to 24 months of personal or business bank statements to calculate your average monthly deposits. That helps contractors with heavy deductions and strong cash flow. The catch: rates typically run 1 to 3 percentage points higher than conventional rates, and down payments range from 10% to 25% depending on credit and property type.
Debt service coverage ratio (DSCR) loans qualify the property rather than the borrower, so they can work for investment properties where the rental income covers the mortgage payment. They don’t apply to a home you plan to live in, but they’re worth knowing about if you’re building a rental portfolio alongside your contracting work.
Non-QM loans don’t carry the same consumer protections as qualified mortgages, and the higher rates add up over 30 years. Treat them as a backup plan. If your conventional application falls short, they can bridge the gap while you build stronger tax return history for a future refinance.
What Underwriting Looks Like
Once you submit a complete package, the file moves into underwriting. The underwriter verifies that everything is internally consistent: tax returns match IRS transcripts, your profit and loss statement aligns with your bank deposits, and the overall picture supports the loan you’re asking for.
Timelines vary. Straightforward files can clear in a few days; self-employed files with complex business structures or multiple income sources often take several weeks.1Fannie Mae. Selling Guide – Underwriting Factors and Documentation for a Self-Employed Borrower Expect the underwriter to come back with conditions: requests to explain specific expenses, justify income fluctuations, or provide additional bank statements. That’s normal, not a warning sign.
After conditional approval, an appraisal (typically $350 to $550) confirms the property is worth at least the loan amount. Final approval follows once every condition is cleared. Budget four to eight weeks from application to closing, and keep your business running as usual during that window. A sudden drop in deposits or a large new business expense can reopen questions the underwriter already put to rest.