Arizona runs on small businesses: contractors and landscapers, real estate agents, truck drivers, salon owners, consultants and gig workers. If that is you, a lender sees your income through your tax returns after your write offs, not through a pay stub. This guide explains how self employed income is counted in 2026, how much history you need, what deductions do to your buying power and when a bank statement or 1099 loan makes more sense.
Quick answer
Lenders treat you as self employed if you own 25% or more of a business or work as an independent contractor. Conventional and FHA loans usually qualify you on two years of tax returns, using net income after expenses, with non cash deductions such as depreciation added back. Fannie Mae can accept one year of returns once you have owned 25% or more of the same business for five years. If your write offs leave too little income on paper, bank statement, 1099 and profit and loss loans can qualify you on deposits or contractor pay instead, usually with a larger down payment and a higher rate.
Who counts as self employed for a mortgage?
Fannie Mae, Freddie Mac and FHA all use the same test: if you own 25% or more of a business, the income you earn from it is self employment income. That covers sole proprietors who file Schedule C, owners of LLCs, S corporations and partnerships, and independent contractors paid on 1099 forms.
If you own less than 25% of the company you work for, lenders treat you like any other employee and use your W2 forms and pay stubs. If you have both, such as a W2 job plus a side business, the lender looks at each source on its own terms, and a side business that shows a loss can reduce the income you qualify with.
How much self employment history do you need?
| Your history | Conventional (Fannie Mae and Freddie Mac) | FHA |
|---|---|---|
| Two years or more | Two years of personal returns, plus business returns in most cases | Two years of personal returns, plus business returns unless your personal returns show rising income and you are not using business funds to close |
| Five years or more | Fannie Mae may accept your most recent year of returns if you have owned 25% or more of the business for those five years | Two years still required |
| One to two years | Possible when your latest return shows a full 12 months of self employment and you worked in the same or a similar field before | Only if you worked at least two years before in the same or a related line of work |
| Less than one year | Generally not enough, because your returns need to show a full year | Generally not enough |
Lenders usually confirm your returns directly with the IRS through tax transcripts, so the figures you filed are the figures they use. If more than a calendar quarter has passed since your tax year ended, FHA also asks for a year to date profit and loss statement and, unless you file Schedule C, a balance sheet.
How do lenders turn your tax returns into income?
They start with net profit, not gross receipts. For a sole proprietor that is the bottom line of Schedule C. Fannie Mae then adds back deductions that did not take cash out of the business that year, such as depreciation, depletion, business use of your home, amortization and casualty losses, and it subtracts income that will not continue.
The add back matters most when you own trucks and equipment. Here is a hypothetical Tucson landscaping contractor who files Schedule C:
| Line | 2024 | 2025 |
|---|---|---|
| Gross receipts | $214,000 | $236,000 |
| Net profit on Schedule C | $58,000 | $66,000 |
| Add back depreciation on the truck, trailer and mowers | $21,000 | $18,000 |
| Qualifying income | $79,000 | $84,000 |
Averaged over two years, that is $81,500 a year, or about $6,792 a month, well above what the net profit alone would suggest. FHA uses the lower of your two year average and your most recent year, and a drop of more than 20% sends an FHA file to manual underwriting. Conventional lenders also have to analyze and explain any decline.
Every deduction that lowers your tax bill also lowers the income a lender can count, unless it is one of the add backs. If you plan to buy in the next year or two, talk with your tax professional about the income you need to show, not just the tax you want to save.
When does a bank statement or 1099 loan make more sense?
When write offs make your taxable income much lower than your real cash flow, non QM loans can qualify you with other records. Each lender designs its own program, but every lender still has to follow the federal ability to repay rule, which means verifying your income with reliable third party records such as bank statements or tax forms.
| Loan type | What you show | Often a fit for |
|---|---|---|
| Bank statement | 12 or 24 months of personal or business statements. The lender counts eligible deposits and applies an expense factor, or uses an expense figure from your CPA. | Owners with strong cash flow and heavy write offs |
| 1099 | One or two years of 1099 forms, usually with a set expense factor | Agents, drivers and contractors paid by a few companies |
| Profit and loss | A 12 or 24 month profit and loss statement prepared or reviewed by a CPA or tax preparer | Growing businesses whose last return lags behind current income |
| Asset based | Verified savings and investments turned into a monthly income figure | Buyers with large savings and modest taxable income |
These programs cost more than a conventional loan. Expect a larger down payment, a higher rate and more months of reserves, with terms that vary from lender to lender. Most do not work with down payment assistance such as HOME Plus. One protection applies on a home you will live in: federal rules allow a prepayment penalty only on certain qualified mortgages, so a non QM loan on your own home cannot carry one.
Tip: Some buyers use a bank statement loan to buy now and refinance into a conventional loan once two full years of tax returns support it. A future refinance is never guaranteed, so weigh the extra interest against what waiting could cost you.
Not sure which way to document your income?
Bianca can review your tax returns and bank statements and show what each path qualifies you for.
Which path fits your situation?
| Your situation | Start by looking at |
|---|---|
| Two or more years in business, and your taxable income covers the payment | Conventional or FHA with your tax returns, plus HOME Plus if you need down payment help |
| Large depreciation on trucks or equipment | Conventional or FHA, with depreciation added back |
| Strong deposits, but heavy write offs | A bank statement loan |
| Paid on 1099 forms by one or two companies | A 1099 loan, or conventional using your Schedule C |
| Self employed less than two years, same line of work as before | Conventional or FHA, using your prior work history |
| Buying with 3% to 5% down | Conventional or FHA, since most non QM loans need more down |
Buying your first home? Our first time home buyer guide covers HOME Plus and the county programs, which work with self employed income documented on tax returns. Bianca’s page on self employed borrowers and her overview of bank statement loans explain the options she offers.
How should you prepare before you apply?
- File your returns on time. Lenders qualify you on filed returns, and an extension can leave your strongest year out of the picture.
- Plan next year’s write offs with your tax professional. Balance the tax you save against the income you need to show.
- Keep business and personal money apart. One dedicated business account makes both your returns and your statements easier to follow.
- Leave a paper trail for deposits. Large transfers and cash deposits without records slow down any file.
- Gather proof of your business. Have your business license or a CPA letter, proof of your ownership share and a year to date profit and loss statement ready.
- Get preapproved both ways. Compare a tax return loan and a bank statement loan on the same price, then ask for official Loan Estimates once you have a property.
Frequently asked questions
Can I get a mortgage in Arizona if I am self employed?
Yes. Most self employed buyers qualify with two years of tax returns on a conventional or FHA loan. If your write offs leave too little income on paper, bank statement, 1099 and profit and loss loans can qualify you another way.
Do lenders add back depreciation for self employed borrowers?
Yes. Fannie Mae adds back depreciation, depletion, business use of your home, amortization and casualty losses, because none of them took cash out of the business that year.
How many years of tax returns do I need if I am self employed?
Usually two years. Fannie Mae can accept one year once you have owned 25% or more of the same business for five years, and bank statement loans use 12 or 24 months of statements instead of returns.
Can I use down payment assistance if I am self employed?
Often, yes, when you qualify on your tax returns with an FHA, VA, USDA or housing agency conventional loan. Programs such as HOME Plus do not usually pair with bank statement or other non QM loans.
What if my self employed income went down last year?
Lenders look closely at any decline. FHA uses the lower of your two year average and your most recent year and requires manual underwriting if income fell by more than 20%, while conventional lenders must document why the income is stable.
Bianca Lopez
Loan Originator with The Mortgage Homemaker, powered by Barrett Financial Group. Helping Arizona buyers and homeowners in Phoenix, Tucson and across the state buy, refinance and invest with confidence.
NMLS #1605655 | Company NMLS #181106
Based in Arizona, licensed in AL, AZ, GA, MA, MO, OR, PA, TN, TX and VA
(520) 907 2520
BiancaJ@barrettfinancial.com
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Self employed and ready to buy?
Find out what your income qualifies for.
Bianca Lopez can review your last two tax returns and your bank statements, show the loan amount each path supports, and compare the payment and cash to close for each.
Sources and official resources
- Fannie Mae Selling Guide: Self employed borrower documentation
- Fannie Mae Selling Guide: Income reported on Schedule C
- Freddie Mac Guide: Section 5304.1, self employed income
- HUD: Single Family Housing Policy Handbook 4000.1
- eCFR: Ability to repay and prepayment penalties, 12 CFR 1026.43
- CFPB: What is a qualified mortgage?
- CFPB: Loan Estimate explainer
- IRS: Self employed individuals tax center
- Arizona Industrial Development Authority: HOME Plus down payment assistance
Information checked October 5, 2026. Rates, loan limits, program rules and assistance funding change, so confirm current terms before you rely on them.
This article is for general education only and is not a loan offer, commitment to lend, or tax or legal advice. Rates, terms, fees and programs vary by lender and are subject to change without notice. All loans are subject to credit approval, underwriting guidelines and property eligibility. Examples are illustrations, not quotes. Down payment assistance is subject to program funding, eligibility and participating lender rules. The Mortgage Homemaker is powered by Barrett Financial Group, L.L.C., NMLS #181106, 2701 East Insight Way, Suite 150, Chandler, AZ 85286, Arizona license #0904774. Bianca Lopez, Loan Originator, NMLS #1605655 (NMLS Consumer Access). The Mortgage Homemaker and Barrett Financial Group are not affiliated with any government agency. Equal Housing Opportunity.
