How To Calculate Self-Employment Income for a Mortgage

Self-employed borrowers face unique challenges when qualifying for a home loan. Traditional lenders expect W-2 pay stubs and tax returns, but self-employed income often fluctuates and includes many write-offs. Aggressive business deductions can make a booming enterprise look low-profit on paper. To address this, many lenders offer alternative programs—most notably Bank Statement Loans and Profit & Loss (P&L) Loans. These non-QM (non-qualified mortgage) options let you qualify based on how your income actually works: either via your bank deposits or your company’s profit statements, rather than just taxable income.

For most self-employed borrowers, lenders will still ultimately calculate a qualifying income. Conventional programs use your net profit (the income after expenses) from tax returns. But with bank-statement or P&L loans, the calculation works differently. Bank Statement Loans turn your deposit history into income, while P&L Loans rely on your business profit and loss statements. Below we explain each approach and how qualifying income is determined.

Two-Year Minimum for Self-Employment

Before calculating income, most lenders want to see at least two years of self-employment history. This shows stability and proves that your business can sustain itself long term. In some cases, you may qualify with just one year if you worked in the same field previously and can show consistent or rising income. For Bank Statement or P&L loans, the same logic applies—lenders want to see that your deposits or profits are steady and sustainable. This is true whether you’re applying in California, Texas, Virginia, Illinois, or Colorado—the minimum history requirement is similar across these states.

Are You Considered Self-Employed?

Lenders will classify you as self-employed if you:

• Receive most of your income via 1099s instead of W-2s.

• Own at least 25% of a business.

• Work as a sole proprietor, freelancer, or independent contractor.

• Rely primarily on dividends, rental income, or royalties.

If you fall into any of these categories, traditional income documentation like pay stubs may not tell your full story. That’s why bank statement and P&L loan programs exist—to recognize cash flow or profitability as the true measure of your income. Whether you’re freelancing in Austin, Texas, running a tech startup in California, or operating a consulting business in Colorado or Virginia, these programs offer flexibility.

Gross vs. Net Income: What Lenders Use

Most banks and lenders will look first at net income (profit after business expenses) when reviewing tax returns, and that’s where many self-employed borrowers lose ground. Lenders average your Schedule C profits (or K‑1 income) over two years, and they often add back certain non-cash deductions like depreciation - but that's barely helpful when many self employed borrowers have very few non-cash deductions relative to the amount of every day expenses they take. Every write-off you take on taxes reduces your reported net income, which can reduce your qualifying income on a traditional loan.

By contrast, bank-statement programs base income on gross cash flow. Lenders tally the deposits into your business or personal accounts over a year (or two) and then apply a standardized expense factor. For example, a lender might count 80% of deposits as income for a sole proprietor (assuming ~20% expenses). Thus bank-statement loans effectively look at your gross receipts with minimal reduction, letting you qualify on higher income when tax deductions are large. In short: conventional loans (and P&L loans) use net business profit, whereas bank-statement loans use gross deposits and adjust for expenses.

What Is a Bank Statement Loan?

A Bank Statement Loan lets self-employed borrowers qualify based on 12–24 months of bank statements instead of tax returns. Instead of calculating income from W-2 wages or net profit, lenders average your bank deposits and then subtract an assumed expense ratio to arrive at qualifying income.

Typical requirements include:

• Bank statements: 12–24 months of personal and/or business statements.

• Credit score: Usually 620–680 (varies by lender).

• Down payment: Often 10–20% (higher than conventional loans).

• Self-employment history: At least 12 months (sometimes 1 year self-employed or 1 year W-2 in same field).

• Debt-to-income ratio: Typically below ~50%.

Income formula:

Monthly Income = (Total deposits × (1 – expense ratio)) ÷ number of months

For example: $360,000 in deposits over 12 months × 0.80 (20% expense ratio) ÷ 12 = $24,000/month. A CPA’s expense letter can replace the assumed factor.

Pros:

• Qualify on actual cash flow, not reduced net profit.

• Less paperwork than tax-return loans.

• May allow shorter self-employment history.

Cons:

• Higher interest rates and fees.

• Larger down payment required.

• Fewer legal protections (non-QM status).

Borrowers across California, Texas, Virginia, Illinois, and Colorado commonly use this program, especially in competitive housing markets where higher qualifying amounts make a big difference.

What Is a Profit & Loss (P&L) Loan?

A P&L Loan lets a business owner qualify using company profit & loss statements instead of tax returns. You submit CPA-prepared P&L statements covering 12–24 months, showing revenues, expenses, and net profit. The lender averages your net income (profits after expenses) to calculate qualifying income.

Typical requirements include:

• P&L statements: CPA-prepared covering 12–24 months.

• Business bank statements: Often requested to verify P&L figures.

• Self-employment history: Usually at least 2 years.

• Ownership: At least 50% of the business.

• Credit score & reserves: 620+ and 3–6 months of reserves.

• Down payment: Typically 10–20%.

Income formula:

Monthly Income = Average monthly net profit from P&L (over 12–24 months)

Example: $60,000 profit in Year 1 and $90,000 profit in Year 2. Average = $75,000/year = $6,250/month. If Year 2 was lower, lenders often use the lower year.

Pros:

• Works well if your P&L shows strong profits.

• CPA validation can add credibility.

Cons:

• Relies on net profit (deductions lower income).

• Requires CPA-prepared documentation.

These loans are popular in professional hubs like Chicago, Illinois and Northern Virginia, where many small business owners have strong CPA-prepared statements.

Bank Statement vs. P&L: Key Differences

• Documentation: P&L requires formal CPA statements; bank-statement loans need only statements.

• Income basis: P&L = net profit; Bank-statement = gross deposits minus expense factor.

• Flexibility: Bank-statement loans favor businesses with high deductions or seasonal swings.

• Scrutiny: P&L loans rely more heavily on profitability documentation.

Example: Alex grosses $1,000,000/year but deducts $950,000 in costs, showing only $50,000 profit. A P&L loan would base income on that $50,000. But his deposits average $80,000/month. With a bank-statement loan (using 80% factor), his qualifying income would be $64,000/month—enough to easily qualify.

Mortgage Qualifying Tips for Self-Employed Borrowers

Self-employment can complicate the mortgage process, but there are steps that strengthen your application:

• Manage your DTI ratio: Pay down credit cards and loans before applying. The lower your debt relative to income, the better.

• Boost your credit score: Aim for 720+ for the best pricing. On-time payments and low credit utilization make a big difference.

• Keep business and personal finances separate: Using one account for everything confuses underwriters. Lenders want to clearly see which deposits belong to the business.

• Plan ahead for documentation: Whether bank statements or P&Ls, have at least 12 months of clean, consistent records ready.

These tips apply no matter where you’re applying—from a jumbo purchase in California to a starter home in Texas or Colorado.

Choosing the Right Option

Both bank-statement and P&L loans exist because self-employed incomes vary widely.

• Bank-statement loans are best for applicants with strong cash flow but high deductions.

• P&L loans fit borrowers whose business net profits are already strong and well-documented.

Rates and terms on both programs are usually higher than conventional loans. Many borrowers first check conventional options with tax returns, then turn to Bank Statement or P&L loans if needed. Most borrowers prefer bank statement loans because it allows for higher qualifying mortgage amounts 99% of the time.

By understanding these methods and preparing the right documents, even self-employed applicants with complex finances can qualify for a mortgage in California, Texas, Virginia, Illinois, or Colorado.

FAQs About Calculating Self-Employed Income

Do mortgage lenders use gross or net income?
Most lenders will require that you use net income after expenses. By working with a mortgage broker, you're able to access bank statement loans that use gross deposits minus an expense factor.

Can I qualify with just one year of self-employment?
Sometimes, yes. If you have at least one year of statements and prior W-2 experience in the same field, many lenders will allow it—especially for bank-statement loans.

How do I calculate 1099 income for a mortgage?
With traditional loans, lenders average your last two years of net income shown on tax returns. With a bank-statement loan, your 1099 deposits over 12–24 months are averaged as gross income, minus an expense factor.

Is it harder to get a mortgage when you’re self-employed?
Traditional loans do impose more scrutiny, but alternatives like bank-statement and P&L loans exist precisely to make qualifying easier for entrepreneurs, freelancers, and contractors across Texas, California, Virginia, Illinois, and Colorado.

Ready to buy? Schedule a call with me today or get in touch with me by completing this quick form and I'll help you qualify for the mortgage you want as a self employed business owner.