Yes, you can get a mortgage as a contractor. You’ll generally need at least two years of self-employment history in the same line of work, two years of federal tax returns, and enough documented net income to fit your lender’s debt-to-income limits. The paperwork is heavier than what a W-2 employee faces, and lenders calculate your income in a way that catches people off guard, but the requirements themselves are straightforward once you know them.
Why Contractor Income Gets Treated Differently
A salaried borrower hands over a couple of pay stubs and a W-2, and the lender knows what they earn. Your income is harder to pin down. Revenue moves month to month, business expenses cut into gross receipts, and the deductions that save you money in April work against you when you’re trying to qualify for a home loan.
The core difference is which number counts. For a W-2 employee, it’s gross salary. For you, it’s net profit after business expenses, averaged over two years. That one distinction shapes every other piece of the process.
The Basic Eligibility Bar
Two Years of Self-Employment
Most lenders want at least two years of continuous self-employment in the same industry.1Freddie Mac. Qualifying for a Mortgage When You’re Self-Employed That gives underwriters enough data to judge whether your income is stable and likely to continue. If you’ve been on your own for less than two full years, some lenders will accept a prior W-2 from the same field combined with your self-employment records.
Established businesses catch a break. If your business has been operating for at least five years, Fannie Mae’s automated underwriting may accept a single year of personal tax returns.2Fannie Mae. Income and Employment Documentation for DU Newer than five years, plan on the full two.
Credit Score
Credit requirements don’t change because you’re a contractor. For a conventional Fannie Mae loan, you’ll need a minimum score of 620 for a fixed-rate mortgage and 640 for an adjustable-rate mortgage.3Fannie Mae. General Requirements for Credit Scores FHA loans go lower: 580 qualifies you for the minimum 3.5% down payment, and scores between 500 and 579 require 10% down.
Debt-to-Income Ratio
Your qualifying income feeds a debt-to-income ratio that compares your total monthly debt (including the proposed mortgage) to your gross monthly income. Conventional loans processed through Fannie Mae’s automated system allow a DTI of up to 50%. Manually underwritten conventional loans cap at 36%, stretching to 45% with strong credit and cash reserves.4Fannie Mae. Debt-to-Income Ratios FHA is often more flexible on the back-end ratio.
Contractor files land in manual underwriting more often than W-2 files do, so the tighter 36% to 45% range is what you’re most likely to face.
How Lenders Calculate Your Qualifying Income
This is the part that surprises most contractors. The income figure lenders use is almost always lower than what you feel you actually earn.
The Two-Year Average
Lenders take the net income from your Schedule C for each of the past two tax years and average them. Net income is what’s left after all business deductions. If you netted $110,000 one year and $90,000 the next, your qualifying income is $100,000, or about $8,333 per month. That monthly figure is what gets plugged into the DTI calculation.
Add-Backs That Work in Your Favor
Certain non-cash deductions you claimed on Schedule C can be added back to your income for mortgage purposes. Fannie Mae specifically allows add-backs for depreciation, depletion, amortization, business use of your home, and casualty losses.5Fannie Mae. Income or Loss Reported on IRS Form 1040, Schedule C Those items reduced your taxable income on paper but didn’t take money out of your pocket. Claim $12,000 in equipment depreciation and a $5,000 home office deduction, and $17,000 gets added back to your qualifying income. For contractors with meaningful equipment, this can noticeably raise the loan amount you qualify for.
When Income Declined From Year One to Year Two
Falling income is a risk flag. Rather than averaging the two years, many underwriters use the lower year’s figure as your qualifying income, or require a written explanation and documentation showing the decline was temporary. A contractor who earned $120,000 in one year and $80,000 the next may qualify on $80,000 rather than the $100,000 average. Steady or growing income in the two tax years before you apply makes a real difference.
The Deduction Trade-Off
Every dollar of business expense you claim reduces both your tax bill and your borrowing power. That’s not a reason to overpay taxes, but if a home purchase is on your horizon, a conversation with your CPA about how aggressive to be with deductions in the two years before you apply is worth having.
What You’ll Need to Document
Tax Returns and Schedules
The foundation is two years of personal federal tax returns (Form 1040), including all schedules.6Fannie Mae. Underwriting Factors and Documentation for a Self-Employed Borrower For sole proprietors, Schedule C is where underwriters focus: gross receipts, business expenses, net profit. If you operate through a partnership or S-corporation, the business returns come in as well.
Lenders verify what you submitted. Fannie Mae requires borrowers to sign IRS Form 4506-C, which lets the lender pull tax transcripts directly from the IRS and compare them against your returns.7Fannie Mae. Requirements and Uses of IRS IVES Request for Transcript of Tax Return (Form 4506-C) Any mismatch raises a flag that can derail the application, so file clean, accurate returns well before you plan to apply.
Income Verification
You’ll also provide 1099-NEC or 1099-MISC forms from clients and a year-to-date profit and loss statement showing your current trajectory.6Fannie Mae. Underwriting Factors and Documentation for a Self-Employed Borrower The P&L should track with your prior returns. If your last two years averaged $90,000 in net income but your current-year P&L shows $40,000 through September, expect the underwriter to ask about it.
Business Verification
Lenders confirm your business exists and is operating. Acceptable documentation includes a business license, an IRS Employer Identification Number confirmation letter, articles of incorporation, or partnership agreements.6Fannie Mae. Underwriting Factors and Documentation for a Self-Employed Borrower A CPA letter confirming the business is active and how long it has been operating also works.
Separate Business and Personal Accounts
Keep them apart. Commingled funds create real headaches during underwriting because the lender can’t easily tell business revenue from personal deposits. Separate accounts keep the paper trail clean and the process faster.
Down Payment
Your down payment requirement depends on the loan program, not your employment type. Contractors aren’t hit with higher minimums.
- Conventional loans start as low as 3% down for a primary residence. Anything under 20% down carries private mortgage insurance until you build enough equity.
- FHA loans start at 3.5% down with a credit score of 580 or above, or 10% down with a score between 500 and 579. FHA mortgage insurance premiums usually stay for the life of the loan.
- Non-QM and bank statement loans typically ask for 10% to 20% down, sometimes more.
In practice, a larger down payment strengthens a contractor’s application. It lowers the loan-to-value ratio, reduces the lender’s risk, and helps offset concerns about income variability. If you can put down 10% to 20%, you’ll see more options and better rates.
Bank Statement and Non-QM Loans
If your tax returns don’t reflect your actual cash flow well enough to qualify for a conventional or FHA loan, bank statement loans are a real alternative. They’re a category of non-qualified mortgage built for self-employed borrowers.
Instead of tax returns, the lender reviews 12 to 24 months of your personal or business bank statements and uses the average monthly deposits to determine income. This helps contractors whose aggressive tax deductions push their Schedule C net income well below what they actually bring in each month. The trade-off is straightforward: bank statement loans typically require 10% to 20% down, carry higher interest rates than conventional loans, and may have stricter credit requirements.
Non-QM loans more broadly offer flexibility on DTI (sometimes above 50%) and accept a wider range of income documentation, including P&L statements alone in some cases. Worth exploring if you’ve been turned down for a conventional or FHA loan, but expect to pay more for the flexibility.
Preparing in the Two Years Before You Apply
The biggest mistake contractors make is treating the mortgage application as something to handle when they’re ready to buy. The two-year lookback on tax returns means the real preparation window is 24 months long.
- Decide with your CPA how aggressively to claim deductions in the years leading up to your application. Lower net income means lower borrowing power.
- Keep income steady or growing between your two most recent tax years. A declining trend hurts more than a flat but modest income.
- Maintain clean records: current P&L, organized 1099s, consistent bookkeeping. Gaps trigger requests that slow everything down.
- Avoid taking on new debt before applying. Every monthly payment reduces the loan amount you qualify for.
- Build liquid savings. Even when reserves aren’t formally required, three to six months of mortgage payments in the bank strengthens the application.
Contractors who plan around how lenders read their income tend to move through the process without major surprises. The rules are heavier on paperwork, but the math is predictable once you know it.