When Your Side Business Shows A Loss

How mortgage lenders really treat negative secondary income

Side hustles are everywhere. Uber driving, an Etsy shop, a consulting gig on nights and weekends.

From a tax standpoint, those activities often show a loss on your return because of write-offs and start-up costs. From a mortgage standpoint, that loss can either be:

  • No big deal, or
  • A serious hit to the income you can use to qualify.

It all depends on the loan type and whether that business is your main income or just a side gig.

Below is a simple breakdown you can use if you are self employed or have a side business and are planning to buy or refinance.

Key idea: primary income vs secondary self-employment

First, lenders look at where your real, stable income comes from.

  • Primary income
    W2 salary, hourly, retirement, or your main self-employment business.
  • Secondary self-employment income
    A side business that shows up on your tax return. It might be Schedule C, an interest in an LLC, rental activity, etc.

Two big questions your lender is asking:

  1. Do you qualify for the mortgage based on your primary income alone
  2. Is that side business showing positive income or a loss on your tax returns

When the side business shows a loss, the agencies treat it very differently.

Conventional loans: Fannie Mae and Freddie Mac

Conventional loans are usually the most flexible when it comes to side business losses.

If your primary income is W2, hourly, part-time, or retirement

  • If you qualify comfortably using just your primary income
  • And your self-employed income is truly secondary

Then:

  • Fannie Mae and Freddie Mac allow the lender to ignore the loss from that secondary self-employment in many cases.
  • That means the negative number on your Schedule C does not have to be subtracted from your qualifying income, as long as the side business is not needed to make the numbers work.

This is a huge win for borrowers who:

  • Have strong W2 income, and
  • Report aggressive write-offs on a small side business.

If self-employment is your main income

If your main job is self-employment and you also have another self-employed activity that is losing money:

  • The lender must analyze all businesses together.
  • Losses from the secondary business usually must be deducted from your income.
  • If the loss is large, the lender may need full business returns and a full cash-flow analysis to see if any of that loss can reasonably be adjusted (for example, big depreciation or a one-time event).

So for conventional:

  • Strong W2 + small side business loss = often OK
  • Main self-employment + second business loss = expect that loss to count against you

FHA loans: side business losses almost always count

FHA is stricter with side business losses.

In general:

  • Any self-employed loss shown on your tax returns is treated as a real loss.
  • That loss is subtracted from your qualifying income, even if your primary income is W2 or retirement.
  • The loan application will still show you as self employed as a secondary source, and the underwriter must consider the loss.

The one major exception

A side business loss may be ignored only if the business is truly closed and you can document that.

Usually that means:

  • A detailed letter explaining when, how, and why the business closed, and
  • Supporting documentation such as:
    • Business license cancellation
    • Final tax return
    • Website and advertising shut down
    • Evidence of no ongoing operations

A simple “I am not doing it anymore” letter, with nothing else, is normally not enough.

VA loans: business losses must be considered

VA looks a lot like FHA in this area.

  • Any business or rollover loss must be considered from the tax returns.
  • If there is a loss tied to self-employment, it is subtracted from the income used to qualify.
  • The loss counts whether the activity is full-time or just a side business.

On joint tax returns:

  • VA expects lenders to use what is actually reported to the IRS.
  • Losses generally need to be allocated in a way that still respects the fact that the return is joint.
  • In many situations, the loss must still reduce the Veteran’s qualifying income in both community and non-community property states.

If both the Veteran and spouse are on the loan, sometimes the spouse’s income helps offset the impact of the loss.

Exception: closed business

Like FHA, VA allows an exception when the side business is clearly closed and properly documented.

Again, that means more than just a short letter. Lenders look for evidence that the business has truly stopped operating.

USDA loans: two income buckets that matter

USDA has two different “buckets” of income:

  1. Annual income
    Used to decide if you are under USDA’s income limits.
  2. Repayment income
    Used to show you can afford the payment.

USDA treats self-employment losses differently in each bucket.

Annual income (for program eligibility)

  • If a business shows a loss, annual income often uses zero for that business rather than a negative number.
  • Positive income is counted unless the business has been closed.

So for eligibility, a loss usually does not help you get under the limit. It just does not add income.

Repayment income (for qualifying)

Here is where it matters:

  • A business loss must be deducted from repayment income unless the business is closed and properly documented.
  • That can reduce the amount of mortgage you qualify for, just like with FHA and VA.

Again, USDA lets the lender exclude a closed business if you provide:

  • A clear explanation of when, why, and how the business was closed
  • Documentation that supports the story
  • Comfort that the business is not continuing quietly on the side

Thinking of shutting down a side business before applying?

If your side business is consistently losing money and you are close on qualifying, you might be tempted to shut it down just to help your mortgage numbers.

A few important points:

  • Lenders are looking for honesty and consistency with your tax returns.
  • If you say a business is closed, they expect to see signs of that:
    • No ongoing deposits or expenses
    • No new advertising or website activity
    • No current business license or LLC renewals
  • Some loan types will still ask for a full explanation and documentation, even after closure.

In other words, closing the business can help, but it has to be real and it has to be documented.

What this means for you

If you have a side business that shows a loss:

  • Conventional loans
    If your W2 or retirement income is strong enough, there is a good chance the lender can ignore that loss for qualifying.
  • FHA, VA, and USDA
    Expect that loss to reduce your qualifying income, unless the business has truly been shut down and documented.

This is one of those areas where a quick online calculator cannot tell the whole story. The same tax return can be read very differently depending on whether the loan is conventional, FHA, VA, or USDA.

Next step: let a lender run the numbers with you

If you:

  • Have a side hustle that shows a loss
  • Are self employed with more than one business, or
  • Are not sure which loan type makes the most sense

The best move is to have a mortgage professional review your full picture, including tax returns, income sources, and goals.

They can:

  • Compare how your income looks under different loan programs
  • Show you how much each program might let you borrow
  • Talk through whether it makes sense to keep, pause, or close a struggling side business before you apply

When you are ready, reach out and we can walk through your situation one-on-one so you know exactly where you stand before you shop for a home or refinance.

Related Posts

Back To Top