Which type of income document is used for self-employed borrowers?

For self-employed borrowers, tax returns are the primary income documentation required by lenders. This is because self-employed individuals may have variable income that is not easily captured through standard wage documentation such as W-2s or pay stubs. Tax returns provide a comprehensive view of the borrower's financial situation, including income reported over a period of time, business deductions, and overall profit or loss from their business activities.

Lenders look for consistency in income over the years, which can be best illustrated through tax returns. For self-employed applicants, it is often necessary to provide both personal tax returns and, if applicable, business tax returns to give lenders insight into the borrower's financial health and stability. This helps ensure that the income they report can support the mortgage payments.

Other options may provide some evidence of income but do not suffice alone for self-employed borrowers. W-2s and pay stubs are typically only relevant for those who are employed and receiving a regular paycheck. 1099s may also be relevant but are often not as comprehensive as tax returns in showing total income and expenses associated with self-employment.