Self-employed person in Texas home office with mortgage documents.

Getting a Texas Mortgage With Fluctuating Income

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

Published By

David Ghazaryan

Owner / Broker / Banker

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(702) 766-3744

NMLS 1486726

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TL;DR

Lenders view inconsistent monthly income as a significant risk, as their models favor predictability and stability for long-term loan repayment.
For conventional loans, underwriters typically average the net income from your last two years of tax returns to determine a qualifying monthly figure.
Alternative financing, such as a bank statement loan, allows Texas freelancers and business owners to qualify using their actual cash flow and bank deposits instead of tax returns.

Why Lenders See Income Swings as a Risk

For a traditional mortgage underwriter, consistency is king. When they review a standard W-2 employee's application, they see a predictable paycheck deposited every two weeks. This predictable pattern makes it easy to calculate a debt-to-income (DTI) ratio and assess the risk of lending. When they look at a self-employed borrower in Texas, from a freelance graphic designer in Austin to an oil and gas consultant in Houston, they often see a much different picture: income volatility.

A few great months followed by a slow month can trigger alarms. It isn't that they think you're not successful; it's that their risk models are built on predictability. A lender’s primary concern is your ability to make payments for the next 30 years. Significant income dips, even if temporary or seasonal, create uncertainty. They might ask:

Was that $5,000 month a sign the business is failing?
Can the borrower handle the mortgage payment during another slow period?
Is this income stream stable and likely to continue?

For example, a freelance web developer might land a $30,000 project and get paid in two large installments in March and April, but then only bill $4,000 in May. While the annual income is strong, the month-to-month swing looks like a red flag to a conventional lender who prefers to see a steady $8,000 to $10,000 each month.

How Underwriters Calculate Self-Employed Income

To smooth out the peaks and valleys of self-employed income, underwriters use a method of averaging. The standard practice for conventional loans (those backed by Fannie Mae and Freddie Mac) is to analyze your past two years of federal income tax returns, including all schedules like Schedule C (for sole proprietors) or K-1s (for partnerships and S-corps).

The calculation typically works like this:

Find the Net Income: They look at your net income after business expenses, not your gross revenue. This is the figure you actually paid taxes on.
Add Back Depreciation: Since depreciation is a non-cash expense, lenders will add it back to your net income, which can help your qualifying amount.
Average the Total: They add the adjusted net income from the most recent two years together and divide by 24 months to get your qualifying monthly income. The data, information, or policy mentioned here may vary over time.

Example Calculation:

Year 1 Net Income (from tax return): $90,000
Year 2 Net Income (from tax return): $120,000
Total Two-Year Income: $90,000 + $120,000 = $210,000
Qualifying Monthly Income: $210,000 / 24 = $8,750

This method provides a conservative, long-term view of your earnings. However, it can be a major roadblock if you have high business expenses written off or if your income has grown significantly in the most recent year.

Self-employed professional calculating income for a mortgage

Solving Income Volatility with a 12-Month Bank Statement Loan

For many self-employed Texans, traditional income averaging doesn't reflect their true financial picture. This is where a Bank Statement Loan becomes a powerful tool. This type of loan is a popular Non-Qualified Mortgage (Non-QM) product designed specifically for borrowers with unconventional income.

Instead of scrutinizing your tax returns, underwriters for a bank statement loan analyze your business bank account deposits over the most recent 12 or 24 months. They use your consistent cash flow to verify your income.

Here’s how it works:

Documentation: You provide 12 or 24 consecutive months of business bank statements.
Deposit Analysis: The lender adds up all the qualifying business deposits during that period.
Expense Factor: They apply a standard expense factor (often 50%, but it can vary based on your industry) to the total deposits to estimate a net income. Alternatively, if you provide a letter from your CPA, they might use a more favorable expense ratio. The data, information, or policy mentioned here may vary over time.
Qualifying Income: The resulting figure is divided by 12 or 24 to determine your monthly qualifying income.

Example for a Houston-based consultant:

Average Monthly Deposits over 12 months: $20,000
Total Annual Deposits: $240,000
Assumed Expense Factor: 50%
Calculated Net Income: $240,000 * (1 - 0.50) = $120,000
Qualifying Monthly Income: $120,000 / 12 = $10,000

This method is a game-changer because it bypasses the issue of tax write-offs. Your aggressive tax strategy to lower your tax bill won't prevent you from qualifying for a home loan.

Addressing a Recent Surge in Income

What happens if your business had a breakout year? Let's say in the previous example, your income was $90,000 two years ago but grew to $150,000 this past year. A conventional loan would still average the two, resulting in a qualifying income of $120,000 annually ($10,000/month). You're not getting full credit for your recent success.

This is another area where alternative lending shines. A 12-month bank statement loan can focus only on your most recent, highest-earning year. The lender bases their decision on your current trajectory, not your past performance. This allows you to qualify for a larger loan amount that is more aligned with your present financial reality, a huge advantage for entrepreneurs in booming Texas markets like Dallas or Austin.

Explaining Slow Months on Your Profit and Loss Statement

Even with bank statement loans, underwriters may ask about significant dips in revenue. It's crucial to be proactive and transparent. The best tool for this is a Letter of Explanation (LOX).

A well-written LOX provides context to the numbers. Don't just state that business was slow; explain why. Common valid reasons include:

Seasonality: A wedding photographer will naturally have slower months in the winter. A landscaping business in North Texas will see revenue dip in January.
Project-Based Work: You may have worked for two months on a large project with a single payout at the end, resulting in zero deposits for a few weeks.
One-Time Events: Perhaps you took a month off for a family emergency or a planned vacation.
Supply Chain Delays: A contractor might have had a project delayed waiting for materials, pushing payments into the next quarter.

Your explanation should be concise, factual, and supported by documentation if possible. Paired with a year-to-date Profit and Loss (P&L) statement showing that your income has since recovered, a LOX can satisfy an underwriter's concerns and keep your application moving forward.

Step-by-Step Documentation for Inconsistent Contract Work

To prepare for a mortgage application as a self-employed Texan, organization is your best asset. Having your documents in order will streamline the process and demonstrate your professionalism to the lender. Follow these steps:

Gather Tax Returns: Have complete, signed federal tax returns (including all schedules) for the past two years.
Compile Bank Statements: Collect 12 to 24 consecutive months of business bank statements. Ensure all pages are included, even the blank ones.
Prepare Financial Statements: Create a current, year-to-date Profit & Loss (P&L) statement and a balance sheet. Your accounting software can typically generate these easily.

Organized documents for a mortgage application

Verify Your Business: Have copies of your business license, LLC formation documents, or a letter from your CPA verifying you have been self-employed for at least two years.
Draft Explanations: Proactively write a Letter of Explanation for any large, unusual deposits (that are not income) or significant gaps in revenue.
Check Your Credit: Pull your credit report well in advance to dispute any errors. A higher credit score can help offset the perceived risk of your fluctuating income.

Non-QM Loan Options in Austin for the Gig Economy

While bank statement loans are the most common solution, they are not the only Non-QM option available for gig economy workers, freelancers, and small business owners in Texas cities like Austin and San Antonio.

Other helpful programs include:

1099-Only Loans: If you are an independent contractor who receives Form 1099s instead of W-2s, some lenders can qualify you based solely on your 1099 income from the past one or two years, simplifying the process. The data, information, or policy mentioned here may vary over time.
Asset-Based Loans (Asset Depletion): For high-net-worth individuals, lenders can calculate a qualifying income based on a percentage of your verified liquid assets (like stocks, bonds, or retirement accounts). This is useful if you have substantial wealth but low taxable income. The data, information, or policy mentioned here may vary over time.
Profit and Loss Only Loans: Some programs allow for qualification based on a P&L statement prepared by a licensed tax professional, avoiding the need for tax returns or bank statements altogether. The data, information, or policy mentioned here may vary over time.

These flexible programs acknowledge that the modern workforce is different. Your income may not be linear, but with the right documentation and loan product, you can successfully secure financing for your Texas home. If you're a self-employed Texan struggling with income verification, a tailored mortgage strategy can make all the difference. Discuss your specific situation with an expert who understands Non-QM loans to map out your path to homeownership.

Your self-employed journey is unique, and your mortgage should be too. Take the next step and apply now to see how our tailored loan solutions can help you achieve your homeownership goals.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.