A salon owner called me last fall after two declines from two different lenders. Her words: "They keep telling me my tax returns show nothing." Her business was healthy. Her deposits were strong. Her CPA had done exactly what a good CPA does, which is keep her taxable income low. Both lenders had looked at one document, her Schedule C, and stopped there. They didn't know she had three other doors she could walk through.

That's the gap I want to close in this post. If you're self-employed, or you refer self-employed clients, the difference between "declined" and "cleared to close" is often just knowing which file to build.

The conventional wisdom that gets it wrong

The story most Realtors and most borrowers carry around goes like this: to get a mortgage, you need two years of tax returns showing enough net income to support the payment. End of list.

That framing made sense in 2008. It hasn't been the full picture for years. Tax-return income (what underwriters call "full doc") is still the cheapest, cleanest path when the numbers work. But it's one of four. When a CPA has done their job and the Schedule C net is intentionally thin, full doc is the wrong tool. Forcing it is how good borrowers get told no.

What's actually true: four documentation paths

Here are the four common ways a self-employed borrower can prove income on a residential mortgage in 2024.

  • Full doc (tax returns). Two years of personal and business returns. Underwriter calculates qualifying income from the net, adds back depreciation and a few other non-cash items, averages it. Best pricing. Worst fit for borrowers with aggressive write-offs.
  • Bank statement loans. 12 or 24 months of personal or business bank statements. Underwriter totals the qualifying deposits and applies an expense factor (often 50% for business statements, sometimes lower with a CPA letter or P&L). No tax returns reviewed for income. Pricing is higher than full doc, but it's a real loan from a real lender, not hard money.
  • P&L only. A CPA-prepared or borrower-prepared profit and loss statement, often paired with a few months of statements to corroborate. Useful when the business is newer, or when deposits are messy (lots of transfers between accounts) but the books are clean.
  • 1099 only. For borrowers who get paid as contractors. Underwriter uses the gross from one or two years of 1099s, applies an expense factor. Great for real estate agents, insurance producers, consultants, anyone whose income lives on a 1099 instead of a W-2 or a Schedule C.

There's a fifth path worth naming: asset depletion. Not income-based. The underwriter takes a portion of your liquid assets (typically retirement and investment accounts), divides by a set number of months, and treats that as qualifying income. Useful for borrowers who are asset-rich and income-light, or who are between businesses.

Each of these is a real, fundable loan program. None of them are "subprime." None require putting 40% down. The pricing premium over full doc is real but not punishing, and for a borrower who would otherwise be told no, the math is usually obvious.

A worked example

Imagine a salon owner. Gross receipts around $850,000 last year. After rent, product, contractor stylists, equipment depreciation, and the usual deductions, her Schedule C net comes in around $92,000. Her CPA is proud of that number, and she should be. It's a great tax outcome.

Divide that net by 12: roughly $7,667/month of qualifying income on full doc. She's looking at a home around $950,000 in an Austin neighborhood she's been eyeing for two years. With taxes and insurance, the payment plus her existing debts pushes her debt-to-income ratio past where full doc will go. Decline.

Now run the same borrower on a 12-month business bank statement program. Total qualifying deposits across her business accounts: roughly $640,000. Apply a 50% expense factor (the standard assumption that half of deposits go to running the business). Qualifying income lands around $26,667/month. Same borrower. Same business. Same year. Different document, different answer.

The pricing on the bank statement loan is higher than the full doc loan she couldn't get. But she closes. That's the tradeoff worth understanding.

When this fits

A few clear signals that one of the non-full-doc paths is worth a conversation:

  • Schedule C or K-1 net income is significantly lower than what the business actually generates in cash.
  • Two or more years in business with consistent deposits, even if the tax picture is uneven.
  • 1099 income that doesn't show up cleanly on a Schedule C (newer contractor, multiple payers).
  • Recently sold a business, sitting on assets, between income chapters.
  • A CPA who's been doing aggressive (and legitimate) tax planning for years.

If any of those describe you or your client, the file deserves more than a glance at line 31 of a Schedule C.

The honest tradeoff

Non-full-doc loans price higher than conventional. Sometimes meaningfully. The down payment requirement is often a touch larger too, usually 10-15% minimum instead of 5%. That's the real cost of these programs, and any lender who pretends otherwise is selling, not advising. The right question isn't "is this loan as cheap as a conventional?" It's "does the payment work for this borrower, on this house, today, and is there a refinance path later if rates move?" Sometimes the answer is yes. Sometimes the right answer is to wait, adjust the tax strategy for a year, and come back full doc. Both are valid.

One more thing. Tax strategy is your CPA's call, not mine. If you're weighing whether to show more income next year to qualify full doc, that's a conversation between you, your CPA, and a lender who can model both scenarios. I'm happy to be the third chair at that table.

If this sounds like you

If you've been told your tax returns "don't support" the house you want, or if you're a Realtor sitting on a strong self-employed buyer who keeps getting nowhere, the next step is a 20-minute call to look at the actual documents and decide which of the four doors fits. No application, no pull, just a read of the file.

DM me, or reach out through austensmith.com. I'll tell you honestly which path the numbers point to.