Conventional and FHA loans qualify you on tax-return income. For self-employed borrowers, that means Schedule C net income (after deductions) for sole proprietors, K-1 distributions for partnerships, or W-2 + K-1 for S-corp owners.

The problem: legitimate business write-offs (home office, vehicle, supplies, depreciation) reduce taxable income on paper, even though your actual cash flow is strong. A consultant grossing $200K with $80K of write-offs shows $120K of taxable income - which is what conventional uses for DTI. Your real spending power is much higher.

Lenders also require 2 years of stable self-employment for conventional approval. Recent transitions from W-2 to self-employed often face a 2-year wait before conventional qualification.

Bank Statement Loans: 12 or 24 months of personal or business bank deposits become qualifying income. Personal accounts: typically 100% of deposits. Business accounts: 50% expense ratio applied (75% with CPA letter). Best for clean deposit history with consistent business revenue.

P&L-Only Loans: a CPA, EA, or licensed tax preparer signs a profit and loss statement covering 12 or 24 months. That document alone qualifies income. Fastest underwriting - no bank statement scrubbing. 0.25-0.5% rate premium over bank statement.

1099-Only Loans: gross income on 1099 forms (often less a 10% expense ratio) becomes qualifying income. Best for real estate agents, insurance agents, gig workers with clean 1099 trails.

Asset-Qualifying Loans (Asset Depletion): liquid asset balance divided by 60-120 months becomes qualifying income. Best for high-net-worth self-employed borrowers with substantial savings but irregular income.

Start with your cleanest documentation. If your business deposits are consistent and clean, bank statement is usually best (lowest rate). If deposits are messy or you co-mingle accounts, P&L-only avoids the deposit-scrubbing pain.

For 1099-heavy income (real estate agents, contractors), 1099-only typically beats bank statement on simplicity.

For retirees or borrowers with $500K+ liquid assets but limited current income, asset-qualifying avoids the income question entirely.

Don't over-optimize for the rate. The 0.25-0.5% rate gap between alt-doc programs is small relative to the underwriting friction. Pick the program where your documentation tells the cleanest story.

Alt-doc rates run 0.25-0.75% above conventional for primary residence at the same FICO and LTV. Alt-doc closing costs typically 1.5-2.5 points origination (vs 0.5-1 point for conventional).

Down payment: 10-15% on primary residence at most programs (vs 3% conventional). Some programs reach 95% LTV at 740+ FICO, but pricing is meaningfully higher at high LTV.

For investment property: 20-25% down typical. DSCR loans (qualifying on property cash flow rather than borrower income) often work better for investment property than alt-doc programs.

Bank Statement: 12 or 24 months of bank statements, business license, CPA letter (sometimes), and proof of self-employment 2+ years. Lender will source any "large deposits" exceeding ~25% of monthly average.

P&L-Only: CPA-signed P&L for the period, CPA preparer letter, business license, 2 years of self-employment. No bank statements required at most programs.

1099-Only: 1099 forms for the qualifying period, 1099 issuer verification, business license, 2 years of self-employment.

Asset Qualifying: 60+ days of seasoned asset balances, asset breakdown by type, age 59.5+ for pre-tax retirement accounts. Source documentation for any large recent transfers.

Aggressive write-offs in the year before applying. The IRS deductions that save you taxes also kill your conventional qualifying income. Some borrowers reduce write-offs in the year before mortgage application; consult a CPA.

Mixing personal and business in one account. For bank statement loans, lenders prefer clean separation. Co-mingled accounts often get treated as business (with the 50% expense ratio applied to all deposits), which kills your qualifying income.

Not pricing alt-doc and conventional both. If your tax returns clearly support qualifying income, conventional almost always wins on rate. Run both.

Ignoring DSCR for investment property. Self-employed investors often default to using their personal income for investment property, but DSCR (qualifying on property cash flow) is usually faster and avoids the personal-income complexity entirely.