HELOC if you're self-employed
The challenge isn't being self-employed. It's that write-offs shrink the income lenders see.
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How do you qualify for a HELOC if you're self-employed?
Most HELOC lenders use two years of personal and business tax returns and average the income. If write-offs make that number too low, some lenders offer bank-statement HELOCs, or a bank-statement cash-out refinance can get to the same cash.
On this page
Documents to have ready
- Two years of personal and business federal returns with all schedules
- Year-to-date profit and loss statement
- Two months of business bank statements
- Business license or CPA letter confirming two years in business
Use a free calculator, or get your HELOC rate from Shawn.
Tips
- Income that dropped year over year is averaged down or questioned; explain it in writing.
- Apply before filing a return with unusually large write-offs if you know you'll need the line.
How lenders calculate your income
Most start with net profit from Schedule C or your business returns, then add back non-cash deductions like depreciation and depletion. The two-year average is the income used, unless the most recent year is lower, in which case it may be used alone.
Example: write-offs versus qualifying income
A contractor's business deposits $240,000 a year. After expenses, depreciation on a truck and a home office deduction, his tax returns show $72,000 of net income this year and $66,000 last year. A standard lender averages the two years ($69,000, or $5,750 a month) and adds back non-cash expenses like depreciation, which might raise qualifying income to around $6,500 a month.
If his debts are $3,400 a month with the new HELOC payment, his debt-to-income ratio is about 52%, too high for many lenders. A bank-statement program might instead count a percentage of his deposits as income, often 50% for a service business, which here would be $10,000 a month, bringing DTI near 34%. The trade-off is a higher rate. Bank statement income calculator.
Add-backs that raise qualifying income
- Depreciation and depletion
- Amortization and casualty losses
- Business use of the home deduction
- Non-recurring losses that won't repeat, with documentation
Lenders subtract things too, such as business debt that comes due within a year. A loan officer can run your returns through the same worksheet the underwriter will use.
If income dropped this year
When the most recent year is lower than the year before, lenders usually use the lower year rather than the average, and ask why. A one-time cause (a large equipment purchase, an illness) with signs of recovery in year-to-date numbers helps. A steady decline over several years may make the income unusable until it stabilizes.
Timing your application
If you're about to file a much stronger year, wait and apply with the new return. If your newest year will be weaker, applying before you file can let the lender use the stronger two years on record, as long as you're honest about the current year when asked.
Related question: HELOC between jobs
Questions people ask
Can I get a HELOC after one year of self-employment?
Sometimes. Some HELOC lenders accept one year of self-employment if you worked in the same line of work as an employee before. Otherwise, consider waiting for a second year of returns or using a bank-statement program.
See what deposits-based income looks like in the bank-statement income calculator.
Self-employed checklist
- Two years of personal and business tax returns, all schedules.
- Year-to-date profit and loss.
- Business license or CPA letter.
- Bank statements if pursuing a bank-statement program.
Bank-statement HELOCs: qualifying on deposits
A bank-statement HELOC skips the tax returns. The lender reads 12 (sometimes 24) months of deposits, often through a secure read-only connection to your bank, and applies an expense factor, a set percentage that stands in for business costs. The rest counts as income. For an owner whose write-offs shrink taxable income, that number is usually much closer to real cash flow.
| Standard HELOC | Bank-statement HELOC | |
|---|---|---|
| Income proof | Two years of tax returns, often a P&L or CPA letter | 12–24 months of bank statements |
| Write-offs | Lower your qualifying income | Don't matter; deposits are the starting point |
| A down year on paper | Can sink the file | Judged on recent deposits |
| Rate | Lower | Usually higher |
| Speed | Weeks, with tax transcripts | Often days on digital programs |
Who it's built for
- Business owners with Schedule C, LLC or S-corp income
- 1099 contractors and freelancers
- Gig and platform workers (rideshare, delivery, marketplace sellers)
- Owner-operator truckers
- 1099 nurses and other travel healthcare workers
- Real estate agents and commissioned sales reps
- Creators and consultants with uneven months
- Anyone with both W-2 and 1099 income
Lenders usually want two years in the same line of work, a business license or CPA letter on some programs, and deposits that are steady rather than one large transfer. Transfers between your own accounts, loans and refunds aren't counted as income.
Also asked
Can a self-employed borrower use a business line of credit instead of a HELOC?
Sometimes, yes. A business line of credit doesn't put your home at risk and is worth comparing for working capital if the business has two or more years of strong revenue, but it often carries a higher rate than a HELOC.
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Sources
Official sources behind this guide.
- What is the difference between a home equity loan and a HELOC? · Consumer Financial Protection Bureau
- What you should know about home equity lines of credit (booklet, PDF) · Consumer Financial Protection Bureau
- Publication 936, Home Mortgage Interest Deduction · Internal Revenue Service