Mortgage 201: Self-Employed and Retired Borrowers

Discover the keys to navigating the mortgage process with ease, even if you are self-employed or retired. Importance of credit score can impact approval.

Self-employed borrowers and retired borrowers can sometimes find it difficult to qualify for a mortgage. The general rule of thumb is that a two-year history of receiving a particular level of income is required alongside the probable likelihood of receiving that level of income for the next three years.

A self-employed borrower is defined by reporting income on schedule C, or a pass-through entity such as an S Corporation, LLC, or Partnership and can provide challenges as qualifying income is determined by net income after expenses, not gross income. Additionally, that income is averaged over a two-year period, which can limit qualifying income for businesses that are experiencing rapid revenue growth. Correctly identifying these income trends is key to success as certain programs only require the most recent year of tax returns, or impute income based on bank activity per bank statements.


In certain circumstances, non-cash deductions such as depreciation, amortization, or business use of home can be added back to net income as qualifying income. Additionally, loss carryovers or isolated business deductions that aren’t representative of the ongoing nature of the business can be added back to qualifying income under the right circumstances.


Lenders typically require two years of tax returns, bank statements, and other documents to verify the income and expenses of self-employed borrowers. Requirements may vary depending on the loan amount, the credit score, and the loan to value1.


While all retirement benefits such as social security, pensions, annuities and the like are all acceptable sources of income, retired borrowers drawing limited income from their investment and retirement accounts may encounter additional challenges as the amount of income they are drawing is insufficient to qualify for a desired mortgage. If sufficient assets exist, this situation can be rectified by either imputing income using an asset depletion model or by strategically utilizing distributions from retirement accounts. In certain circumstances, market fluctuations of asset accounts may impact the ability or desirability of distributions, which may be addressed using different instruments2.


While these factors may seem like unsurmountable obstacles, solutions can be found utilizing an experienced professional who not only understands the options available, but also sufficiently determines a borrower’s specific circumstances. Providing a lender with sufficient evidence of income history and sustainability, self-employed and retired borrowers can obtain quality mortgage financing with competitive terms.

Footnotes and Estimated Posting dates:

1. See Mortgage 101

2. See Sequence of Return Risk (6/24/24)

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.