How can  the self employed qualify for a home loan?  In the past self employed individuals with decent to excellent credit did not need to genuinely prove their income.  They could use bank statements, substantial, state it or don't provide any income documentation at all.  They could also get away with putting little or no money down.  However, with the tightening guidelines of the mortgage market and the elimination of stated and no doc loan programs, it is a lot harder for the self employed to get qualified. 

Here are your options:

1. Take fewer deductions on your tax returns.   Your Adjusted Gross Income (AGI) after all expenses tells to the lender what your working cashflow is on a yearly basis.  You must show enough income on your taxes to support your total debts. Your Debt to Income Ratio (DTI) should be 42% or less if you're getting a conventional loan and putting less than 20% down.   For an FHA(Federal Housing Administration) loan, your DTI can go up to 45% .  The down side to having a higher AGI is that you will owe more money to Uncle Sam.

2. Cut a paycheck - Talk to your attorney or tax accountant about creating a corporation, LLC or another type of organization that is a separate entity and collect paychecks from the entity.  You will need to pay yourself for at least one year and  then send out a W-2 to yourself. This option also involves more paperwork and potentially more tax liabilities.   

3. Get a job - Get a job and make sure the new job is in the same line of work as your self employment and that you are paid as a W-2 employee.  With this option, you will need one year W-2.

4. Consider Seller Financing - Look for homes where the seller is willing to finance.    The seller may require a larger down payment than the institutional lender but it is all negotiable.  Additionally, a seller financing his own property will not have the formal underwriting guidelines of an institutional lender.

5. Hard Money Lender This is the least attractive option because a hard money lender will require a substantial down payment (normally around 40%) and will charge an interest rate over 10%.

One of the benefits to being self employed is the ability to write off expenses and pay less overall income taxes.  Nevertheless in today's mortgage environment,  the only legitimate way to verify income is through  income tax returns, past & W-2s.  Self employed individuals need more than good credit and a large down payment to qualify for a home loan.  They need to be prepared to prove their income.