If you own a business in the Valley, you already know the trap: your CPA works hard to lower your taxable income, and then a lender uses that lower number to decide how much house you can buy. The good news is that the rules give credit for more than your bottom line, and when they do not, there are loans built around your deposits instead. This guide shows how lenders read each type of business in 2026, walks through a Peoria S corporation example, and explains when a bank statement loan is worth its higher cost.
Quick answer
You are self employed in a lender’s eyes if you own 25% or more of a business or work on 1099 pay. Conventional and FHA loans usually need two years of tax returns, and the income they count depends on how your business files. S corporation owners can count their W2 wages plus their share of business income, as long as distributions or cash in the business support it, with depreciation added back. When write offs leave too little income on your returns, a bank statement loan can qualify you on 12 or 24 months of deposits instead, usually with more down and a higher rate.
How does the way your business files change your mortgage?
Fannie Mae, Freddie Mac and FHA treat you as self employed once you own at least 25% of a business. What the lender asks for, and which numbers it uses, follows the way the business reports to the IRS:
| How you file | Common for | Income the lender starts from |
|---|---|---|
| Schedule C (sole proprietor or single member LLC) | Contractors, agents, rideshare and delivery drivers, consultants | Net profit on Schedule C, plus add backs |
| S corporation (Form 1120S) | Established trades and service businesses | Your W2 wages from the company plus your share of ordinary income on Schedule K1, plus add backs |
| Partnership or multi member LLC (Form 1065) | Businesses with partners | Your share of ordinary income on Schedule K1, plus guaranteed payments and add backs |
| 1099 pay with no separate business | Independent contractors paid by a few companies | Your Schedule C, or the 1099 forms themselves on a non QM 1099 loan |
The add backs are deductions that reduced your taxable income without costing the business cash that year, chiefly depreciation, depletion and amortization, along with casualty losses and other one time losses. On the other side, lenders subtract items such as the meals exclusion and business debts that come due within a year.
How is an S corporation owner’s income calculated?
Here is a hypothetical Peoria HVAC company, owned 100% by one borrower who pays himself a salary through the business:
| Line | 2024 | 2025 |
|---|---|---|
| W2 wages paid by his company | $60,000 | $62,000 |
| Ordinary business income on his Schedule K1 | $28,000 | $34,000 |
| Depreciation on the company’s return, added back | $14,000 | $12,000 |
| Qualifying income | $102,000 | $108,000 |
Averaged over two years, that is $105,000 a year, or $8,750 a month. There is one important condition. Fannie Mae lets the lender count the K1 business income only if the owner actually took distributions in line with it, or if the business has enough cash and liquid assets to support taking that money out. Without either one, this borrower would qualify on his W2 wages alone, about $5,083 a month. Keeping a healthy business account and a regular distribution pattern protects your buying power.
How much history do you need, and what if income dropped?
Two years of self employment is the standard for conventional and FHA loans. A shorter history can work when your most recent return shows at least a full year in business and you worked in the same field before. Fannie Mae can accept a single year of returns when you have owned 25% or more of the same business for at least five years.
Lenders also look at the direction of your income. When the most recent year is lower, they typically use the lower year rather than the average and need to show the business is stable. FHA requires a manual review when income fell more than 20%. If 2025 was a rough year for your business, it is worth talking it through before you apply.
When does a bank statement loan make more sense?
If your returns show far less income than your business really brings in, a bank statement loan looks at deposits instead. The lender reviews 12 or 24 months of business or personal statements, counts the eligible deposits and subtracts an expense factor for what it costs to run the business. Many lenders apply a standard expense factor to business accounts, often around 50%, unless your CPA or tax preparer documents a lower one.
| Hypothetical example | Standard expense factor | Expense ratio documented by a CPA |
|---|---|---|
| Eligible business deposits over 12 months | $180,000 | $180,000 |
| Expense factor | 50% | 30% |
| Qualifying income per year | $90,000 | $126,000 |
| Qualifying income per month | $7,500 | $10,500 |
The tradeoffs are real. Expect a higher rate than a conventional loan, a larger down payment, more weight on your credit score and more months of reserves. Transfers between your own accounts and large deposits you cannot source are usually backed out, and down payment assistance does not pair with these loans. On a home you live in, a non QM loan like this cannot carry a prepayment penalty, because federal rules allow one only on certain qualified mortgages. Dave’s page on bank statement loans covers the program in more detail.
Want to see both numbers?
Dave can run your tax returns and your bank statements side by side and show which path gets you approved for more.
What are the other ways to qualify?
- 1099 loans: contractors paid by one or two companies can qualify on one or two years of 1099 forms, usually with a set expense factor.
- Profit and loss loans: some lenders accept a 12 or 24 month profit and loss statement prepared by a CPA or tax preparer, useful when your business is growing faster than your last return shows.
- Asset depletion: if you have substantial savings or investments, some programs turn those assets into monthly income. Dave’s article on an asset depletion approval shows how that works for a real borrower.
- Adding a W2 co borrower: a spouse or partner with salaried income can strengthen a conventional or FHA application, as long as they will be on the loan.
Not sure where you fit? Start with Dave’s overview for self employed borrowers, or if you are a first time buyer, his first time buyer guide explains the Maricopa County assistance programs that work with income documented on tax returns.
How should you prepare in the months before you apply?
- Talk to your CPA before year end. Decide together how much income you need to show, since every deduction that is not an add back lowers your buying power.
- Separate the money. Run all business income and expenses through one business account and pay yourself on a regular schedule.
- Keep your distributions consistent. If you file as an S corporation or partnership, regular distributions make it easier to count your share of business income.
- Avoid cash and mystery deposits. Deposit checks and transfers with a paper trail, and skip large cash deposits in the months before you apply.
- Gather your file. Have two years of personal and business returns, K1s, a year to date profit and loss statement, your business license or CPA letter and proof of ownership ready.
- Compare both paths before you shop. Get a preapproval based on your returns and a quote based on your bank statements, then choose the one that fits your price range and budget.
Frequently asked questions
Can an S corporation owner count business income for a mortgage?
Yes. Lenders add your W2 wages from the company to your share of ordinary income on Schedule K1 and add back items like depreciation. Fannie Mae requires that your distributions or the business’s cash and liquid assets support the K1 income being used.
What expense factor do bank statement lenders use?
It varies by lender. Many apply a standard factor to business account deposits, often around 50%, and some accept a lower figure documented by your CPA or tax preparer.
Can I get a mortgage in Phoenix with only one year of self employment?
Sometimes. Conventional and FHA loans can accept a shorter history when your latest return shows at least a full year in business and you worked in the same field before. Bank statement programs set their own history rules.
Can I use down payment assistance with a bank statement loan?
Usually not. Programs such as HOME Plus and Home in Five Advantage work only with government loans such as FHA and VA and with housing agency conventional loans, so you would need to qualify on your tax returns to use them.
Do lenders use my gross deposits or my net income?
On a conventional or FHA loan, lenders start from the net income on your tax returns and add back items like depreciation. On a bank statement loan, they start from your eligible deposits and subtract an expense factor.
David Martel
Mortgage Loan Originator with Barrett Financial Group, known online as Dave The Mortgage Guy. With access to more than 100 lenders, he helps Phoenix area buyers, self employed borrowers and investors find the right loan.
NMLS #2521668 | Company NMLS #181106
Based in Arizona. Current state licenses are listed on NMLS Consumer Access.
Told no by a bank?
Find out what your business income can really buy.
Dave Martel is self employed too. He can review your returns, your K1s and your bank statements, then show you the loan amount and payment each path supports.
Sources and official resources
- Fannie Mae Selling Guide: Self employed borrower documentation
- Fannie Mae Selling Guide: Analyzing returns for an S corporation
- Fannie Mae Selling Guide: Business structures
- 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?
- 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. Dave The Mortgage Guy is powered by Barrett Financial Group, L.L.C., NMLS #181106, 2701 East Insight Way, Suite 150, Chandler, AZ 85286, Arizona license #0904774. David Martel, Mortgage Loan Originator, NMLS #2521668 (NMLS Consumer Access). Dave The Mortgage Guy and Barrett Financial Group are not affiliated with any government agency, including HUD, FHA and the VA. Equal Housing Opportunity.
