A Small Business Owner’s Guide to Getting a Mortgage

• Compared to traditional W-2 borrowers, most lenders require small business owners to supply additional paperwork to show their business is healthy and they have consistent earnings.
• When evaluating applications, underwriters consider a variety of factors; new vs. gross income, business expenses, and income trends are among the most important.
• There are many different home loans for small business owners; some of the more popular options include bank statement loans, conventional loans, FHA loans, and VA loans.

Applying for a home mortgage for small business owners isn’t exactly a walk in the park. There are obstacles to overcome, some of which are avoidable, and some of which you’ll need to deal with. One of the biggest challenges, though, is when a prospective homebuyer who owns a small business fails to recognize how their involvement in an LLC (limited liability corporation), sole proprietorship, or corporation impacts their status as a borrower.

Let’s get into it.

Lenders tend to prefer predictable income

Traditional jobs come with W-2s, reliable tax documents lenders can use to verify your source of income and that you have consistent earnings. Small business owners file their taxable income and expenses using Schedule C (for sole proprietors) or Schedule K-1 (for LLC or S-corporation owners), which report net income after deductions. Schedule C and Schedule K-1 income is less predictable because it’s subject to fluctuations in business performance and harder to verify, both of which signal risk to lenders.

To make up for this, many lenders require small business owners to provide two years of filed Schedule C or Schedule K-1 income, a current year profit-and-loss (P&L) statement or year-to-date (YTD) figures, a business bank statement, and other documentation in their mortgage application to corroborate their earnings.

Even if you collect a W-2 as an employee of your company, you must disclose your stake in the corporation in your application. There’s no point in trying to hide this; underwriters are very good at what they do and can easily discover your financial interest(s) in a corporation, so it’s best to be upfront and honest.

Business deductions can lower your qualifying income

While deductions are necessary to lower your tax liability, they can also make it appear as though you have less disposable income. Since lenders use net income to qualify borrowers, if you have high deductions, they may question your ability to afford monthly repayments.

There’s a lot of paperwork to manage

In addition to surplus documents to corroborate your income, lenders may request that you provide business licenses, incorporation/LLC documents, insurance certificates, and even CPA letters or client contracts to demonstrate that your business is in good standing. You’ll want to triple-check every mortgage application you fill out to ensure you understand what documentation is required and that you have it on hand. Fail to include even a single piece of paperwork, and an underwriter could deny your application, so it’s important to be prepared.

You need to know your percentage of ownership

The general rule of thumb is that if you own 25% or more of the voting stock of a corporation, you’re technically classified as self-employed and must provide a corporate tax return. That return, whether it shows a profit or a loss, can have a major impact on your status as a borrower.

If your business made a profit, you’re eligible to report some or all of that profit on your income depending upon your percentage of ownership. For example, if you own 25% of a corporation that made $10,000 in profit last year, a mortgage broker can add $2,500 to your total income.

If your business reported a loss, you’re going to have to apply it to your reported income. If you own 100% of the voting stock in your business, and that business lost $10,000 last year, a broker will subtract that $10,000 from your reported income.

When lenders evaluate self-employment income, they typically look at three things:

Beyond self-employment income, an underwriter will also consider the following when they review your application:

• Your employment history
• Your credit score
• Your debt-to-income (DTI) ratio, which shows your monthly debt payments to your gross monthly income
• Any assets you hold, including bank accounts, investment accounts, retirement accounts, any other property you own, and other high-value items
• Cash reserves, which is the amount of money you have set aside to cover unexpected expenses

As a small business owner, you’re technically eligible to apply for any of the same home loan products as a traditional W-2 borrower; however, you may find some options easier to qualify for than others. Those options include:

• Bank Statement Loan: As its name implies, a bank statement loan uses business bank statements to verify income instead of tax returns. If you choose to apply for this type of mortgage, expect lenders to request 12 to 24 months of bank statements as proof of regular deposits. This option works best for self-employed borrowers whose businesses have variable income, where traditional documentation may not reflect your true earning potential.
• Conventional Loan: If your business has been profitable for several years and you have a strong credit score, you may qualify for a standard fixed rate or adjustable rate mortgage, both of which are types of conventional loans. Just remember that lenders will expect to see comprehensive documentation, including tax returns and P&L statements. For the best rates, your business should show consistent profitability over the past two years.
• FHA Loan: Backed by the Federal Housing Administration, FHA loans are ideal for borrowers with lower credit scores and allow you to put as little as 3.5% down. While you’ll still need to provide proof of income, FHA loans tend to be more forgiving of self-employment income verification, which could make this a good alternative to a conventional loan.
• VA Loan: Veterans and active duty service members are eligible for VA loans, a government-backed loan program that comes with no down payment requirement and more lenient underwriting. If your business has irregular income but you meet eligibility requirements, this program is worth considering.

Getting a home loan as a small business owner comes down to whether your income is documented in a way that meets underwriting guidelines, using the forms and patterns lenders rely on to measure stability. Here’s some practical advice to ensure your application is up to snuff:

• Keep business and personal expenses separate. Underwriters are trying to verify that your income is real, recurring, and attributable to you. When your personal spending runs through your business account (or vice versa), an underwriter may have to discount deposits, as they cannot clearly distinguish between business revenue and reimbursements or transfers. That can shrink your qualifying income, even if your business is healthy. Keep accounts and cards separate and pay yourself intentionally, whether that’s through salary, owner draw, or distributions. A clean separation makes it easier to produce a credible YTD P&L statement that matches your bank activity, which is exactly the kind of consistency underwriters are looking for.
• Assemble the right team. A solid homebuying team includes multiple roles, but the two most important are a loan officer who has experience working with self-employed borrowers and a tax professional who understands how underwriters read returns. While a loan officer is valuable, both for helping identify the right loan option and navigating the application process, a tax professional is essential because what makes for good tax strategy is very different from what makes for good loan documentation. For example, aggressive deductions may lower your taxable income, but they’ll also lower your qualifying income, which could hurt you when you go to apply for a mortgage.
• Document your cash reserves and self-employment income. Cash reserves are a sign of credibility. By demonstrating that you have adequate liquid assets, you reduce the perceived risk of variable income and business seasonality in the eyes of underwriters. Reserves can also offset other weaknesses, such as a shorter self-employment history or a higher DTI. On the income side, expect lenders to focus on how you document income based on your setup: Schedule C, Schedule K-1, and business returns (such as 1120S or 1065) when ownership crosses key thresholds. The goal is to show stable, explainable income trends and a business that supports your earnings. If your income dipped due to a one-time event, document that clearly so the underwriter doesn’t assume the decline is ongoing.
• Compile your paperwork. Plan on providing two years of personal returns and, if you meet ownership thresholds or your entity type requires it, two years of business returns. Many lenders also want to see a YTD P&L statement, especially if the tax year isn’t filed yet. The more comprehensive your documentation, the less likely you are to run into underwriting delays, and the more likely you are to be approved. For reference, here’s a complete list of documents mortgage lenders require for small business owners:
  • Government-issued photo ID
  • Social Security Number
  • 2 years of personal federal tax returns with all schedules
  • W-2s (if you receive W-2 income, including from your own S-corp payroll)
  • 2 years of business income tax returns
  • YTD P&L statement
  • YTD balance sheets
  • Business bank statements
  • Entity and ownership documents
  • Business license, permits, and proof of insurance (where applicable)
  • 2–3 months of statements for checking and savings accounts, brokerage accounts, and retirement accounts (if you’re using them for reserves or funds)
  • Documentation for large deposits
  • Authorization for the lender to pull your credit
  • Statements for debts not fully reflected on your credit report (e.g. tax payment plans, private loans)
  • Verification of current housing payments (rent or mortgage)
  • Purchase contract and addenda
  • Homeowners insurance quote or binder
  • Gift letters (if using gift funds)
•  Prepare to explain your business. If your income is project-based, seasonal, or concentrated with one or two clients, expect questions from underwriters and prepare responses in the form of careful documentation — contracts, invoices, receivables aging, YTL P&L, and so on. Again, if last year dipped for an explainable reason, put it in writing and connect it to numbers.
• Maintain a healthy credit score. Strong credit can offset the extra scrutiny that comes with self-employment income. Keep your utilization low, avoid opening new accounts before applying (and definitely don’t open any during the application process), and correct any errors that appear in your credit report. If you’re planning ahead, pay balances down before statement dates, not just before due dates, and avoid large unexplained deposits or credit inquiries right before prequalification. Looking for even more tips on how to improve your credit? We’ve got you covered.
• Pay down consumer debts. Most self-employed borrowers aren’t declined because their business is bad but because of a high DTI ratio, which can happen when their qualifying income is lowered by deductions or their business has a down year. Paying down revolving debt, such as credit cards, can reduce your monthly obligations and improve your credit score if utilization drops. Target debts with the highest monthly payments first, because underwriters look at required monthly obligations, not the total balance. And if you’re close to qualifying, even a slight reduction in your monthly payments can help you secure approval without making any changes to your business.
• Save up for your down payment. A larger down payment can lower your loan-to-value ratio, improve pricing, and often ease underwriting concerns that come with variable income. Where possible, keep down payment funds easy to source and avoid any last-minute transfers that will trigger additional sourcing requirements. The cleaner the paper trail, the fewer questions underwriters will have.
• Be patient. In some cases, the only solution as a small business owner looking to get approved for a mortgage is patience — especially if you reported a loss in the previous year. If this sounds like you, the best strategy is to take your rejection in stride and channel your focus into improving your financial situation. With the right team in your corner, a little hard work, and a lot of patience, homeownership is achievable.

If your mortgage application is denied, don’t get discouraged. The best way to improve your chances of approval the next time around is by addressing the underlying issues that led to your denial, such as paying down debts, increasing your income, or improving your credit score. The lender should provide a mortgage rejection letter that clearly spells out their reasoning, which you should use as a roadmap to get back on track.

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Blue Water Mortgage has helped countless small business owners figure out how to get approved for the mortgage that makes the most sense for them and their business. We even help those whose income has increased refinance for better loan terms. If that sounds like you, contact us today to take the first step toward getting pre-qualified.

Can I get a mortgage if I’ve been self-employed for less than two years?

It is possible to get a mortgage if you’ve been self-employed for less than two years, but it depends on the loan type and strength of the application. Many conventional lenders want to see a two-year history of self-employment income to show that it’s consistent. VA loans also treat self-employment income as stable at two years. Applications with less than two years are usually subject to additional scrutiny and may require additional supporting documentation.

How many years of tax returns do I need as a small business owner applying for a home loan?

Most lenders require small business owners applying for a home loan to provide the most recent two years of personal tax returns, and two years of business returns, as well, depending on how you file and your ownership percentage. You may be asked for YTD financials even if you have two full years of returns, especially if it’s been a while since your last filed year or your income has meaningfully changed.

Can I use business income to qualify for a mortgage?

Yes, you can use business income to qualify for a mortgage, but it must be documented and usable according to underwriting rules. Your lender will look at your business structure and supporting tax forms — Schedule C for sole proprietors, Schedule K-1 and business returns for partnerships and S-corps. It’s important to note that lenders are qualifying your share of earnings and your ability to access them, which is why underwriters care about ownership percentage, stability, and whether your business can support distributions without harming operations.

Can an LLC get a 30-year mortgage?

With most home loans, the mortgage is made to you, personally, even if the income you used to qualify comes from an LLC you own. Traditional 30-year conventional and government loans are designed for consumers (and, in many cases, primary residences), not for an LLC to be the borrower. That said, there are scenarios where title and entity structure can get more complex, but those typically fall outside standard owner-occupied mortgage guidelines.