Yes. Low taxable income doesn't rule out a mortgage. A conventional loan qualifies you on what your tax returns show after write-offs, with a few deductions added back. A non-QM loan can look at something else instead: your bank deposits, a profit and loss statement, your 1099s, or your assets. Which one fits depends on how your business is set up and what your deposits look like, so look at both before you change anything about how you file.

Your CPA did a great job. That's often the problem. The same deductions that lower your tax bill also lower the income a lender is allowed to count.

Why do write-offs lower the income a lender can count?

A conventional lender starts with your filed tax returns. For a sole proprietor, that's the net profit on Schedule C, not your gross sales. If your business brought in $300,000 and you deducted $240,000, the starting point is $60,000.

Some deductions get added back because they aren't cash you spent this year. Fannie Mae's guidelines add back depreciation, depletion, business use of your home, amortization and casualty losses. Everything else you wrote off (vehicle costs beyond depreciation, meals, equipment, contractors, the phone plan) generally stays deducted.

Lenders also usually average two years. If this year is lower than last year, expect questions, and the lender may use the lower year.

That's why a business owner who's doing well can still come out on paper looking like they make less than their employees.

What are the other ways to show income?

Non-QM programs (loans outside the standard Fannie Mae and Freddie Mac rules) qualify you on documents other than tax returns. The main ones:

  • Bank statements. The lender reviews 12 or 24 months of personal or business statements and counts deposits, usually after applying an expense factor for business accounts. This is the most common route for owners with big write-offs. More on bank statement loans.
  • Profit and loss statement. Some programs qualify you on a P&L, often prepared or signed by a CPA or tax preparer, sometimes with a few months of statements to back it up. See P&L mortgages.
  • 1099s. If you're paid on 1099s, some programs use the gross amount on the forms with a set expense factor instead of your Schedule C. See 1099-only mortgages.
  • Assets. If you have substantial savings or investment accounts, an asset-based loan can turn those balances into qualifying income without leaning on your business at all. See asset depletion mortgages.

If you own part of a partnership or S corp, the K-1 income guide covers how that's handled.

I do a lot of bank statement loans, some P&L and 1099 loans, and a lot of asset-based loans. Asset-based is useful when W-2 or self-employment income isn't quite enough: we can calculate income from your assets and add it on top to get over the hump of qualifying. All of these options are available at GoRascal today.

Each program has its own rules on credit, down payment, reserves and how deposits are counted, and they change from lender to lender. Treat any of these as an option to review, not a sure thing.

A lot of people assume that if it isn't a conventional loan, the process will be tedious and the pricing will be sky-high. That isn't how it usually plays out. Pricing depends on the scenario, and many borrowers find it isn't what they feared. Documentation-wise, these loans are usually much easier from an underwriting standpoint.

When is a conventional loan still the better fit?

Sometimes the tax returns work better than people think. After the add-backs, the income may be enough, especially if you have big depreciation or a home office. A conventional loan usually has more flexible terms, generally no prepayment penalty, and broader program choices, so if you qualify, it's usually where to start.

The honest answer comes from running it both ways: your returns through a conventional calculation, and your statements through a bank statement calculation. Then compare the full loans, not just one number.

If you go non-QM now, you can often refinance into a conventional loan later, once your returns show more income. Here's what that refinance takes.

What should you gather before you talk to a lender?

You'll get a straight answer faster with:

  • Your last two years of personal tax returns, all schedules, and business returns if you file them
  • The last 12 to 24 months of bank statements for the account where your business income lands
  • A year-to-date profit and loss statement, if you have one
  • Your 1099s, if you're paid that way
  • Recent statements for savings, brokerage and retirement accounts
  • How long you've owned the business, and your ownership percentage

For how underwriters actually read these, see how self-employed income is calculated.

Should you stop writing things off so you can qualify?

Talk to your CPA before you change anything. I'm not a tax advisor, and the tax side of that choice is theirs to weigh.

I tell people to have their CPA do the taxes the way they're supposed to be done. A lot of times we can add back some things on the mortgage side. Even when we can't, we have alternative ways to qualify using alternative income, so rewriting how you file just to chase a conventional number often isn't worth it.

From the mortgage side, here's what matters. Showing more income on next year's return only helps a conventional loan after that return is filed, and lenders usually average two years, so one higher year may not move the number as much as you'd hope. Paying more tax to qualify for a loan you could get today with a bank statement program isn't always the right trade. Sometimes it is, especially if you're planning for a purchase a year or two out.

If you're planning ahead, the best time to have that conversation is before you file, with your CPA and your loan officer both in it. CPAs, I put together some resources for your self-employed clients.

Who helps self-employed borrowers with low taxable income in Austin?

Adam Styer, Senior Loan Officer, NMLS #513013, with The Styer Team, Powered by Go Rascal Inc., Company NMLS #2072896, works with self-employed borrowers and business owners across Austin and Central Texas. He reviews tax-return and non-QM options side by side, including bank statement, P&L, 1099 and asset-based programs. He is licensed in Texas only. More on self-employed mortgages in Austin and mortgages for business owners.

Here's an example from a file I'm working on right now. A borrower shows about $40,000 a year of income on tax returns, but owns the company 100%. The business has a lot of deposits. Using a bank statement loan with a 50% expense factor, the qualifying income we can use is about $95,000 a month. Expense factors vary by program and by the type of business, so that number isn't a template. It just shows how far the tax-return number and the deposit picture can diverge.

Frequently asked questions

Do I need two years of tax returns?

For a conventional loan, usually yes. Fannie Mae generally wants a two-year history, though a shorter history can work in some cases, and one year of returns can be enough if the business has existed for at least five years. Bank statement and other non-QM programs don't qualify you on tax returns at all.

Can I use personal or business bank statements?

Many bank statement programs accept either. Business statements usually have an expense factor applied to deposits. Personal statements are often counted more directly but need to show your business income landing there consistently.

Does a CPA letter help?

Often, yes. Many non-QM lenders ask for a CPA or tax preparer letter to confirm you own the business, how long it's been operating, and sometimes the expense ratio. Requirements vary by lender.

Can I qualify with one year in business?

Sometimes. Fannie Mae allows less than two years in some cases if your latest returns show a full year from the current business and you worked in the same field before. Some non-QM programs also work with shorter histories. It depends on your background.

Does a non-QM loan cost more than a conventional loan?

Pricing depends on your credit, down payment, the program and the full loan. Many borrowers find it isn't what they feared once they see a real scenario side by side with conventional. That's why it's worth comparing the full loans, not just one number.

Can I refinance into a conventional loan later?

Usually, yes. Once your filed returns support a conventional loan and the new loan makes sense, you can refinance. Check for a prepayment penalty first. Here's how that works.

Next step

If your tax returns don't tell the whole story, send me your last two years of returns and a few months of statements through the contact page, and I'll tell you which way reads better and what I'd look at next. When you're ready, you can start a loan application to get pre-qualified.

Adam Styer, Senior Loan Officer, NMLS #513013 | The Styer Team, Powered by Go Rascal Inc. | Company NMLS #2072896 | Licensed in Texas. Loans are arranged through third party lenders. All loans subject to underwriting approval; program guidelines vary by lender and can change. This article is general information, not tax advice.