How lenders count self-employed income
If you’re self-employed, lenders generally use your tax returns rather than what your business deposits. For a sole proprietor, the starting point is net profit from Schedule C, which is usually much lower than gross revenue after business deductions. That’s why self-employed borrowers often qualify for less than they expect.
What gets added back
Some deductions don’t represent cash leaving your pocket, so lenders add them back to your net profit. The most common are depreciation and depletion, business use of your home, and the depreciation portion of the standard mileage rate. The calculator follows the common conventional method (Fannie Mae’s cash flow analysis, Form 1084), simplified for Schedule C filers.
The two-year average
Lenders usually average the last two years. If income rose, they use the average. If it fell, they look closely at why and may use only the lower year. A sharp drop can make the income unusable until it stabilizes.
An example
Net profit of $95,000 and then $110,000, with $5,000 and $6,000 of depreciation added back, gives adjusted income of $100,000 and $116,000, for a two-year average of about $9,000 a month.
Other options
Bank-statement loans qualify you on deposits instead of tax returns, usually at higher rates. If you own an S-corporation or partnership, lenders also use your K-1s and business returns.
Preparing to apply
Have two years of personal and business tax returns ready, with all schedules, plus a year-to-date profit and loss statement and recent business bank statements. If you plan to buy soon, talk with your tax preparer before filing: aggressive deductions lower your taxes but also lower the income lenders can use.
Questions buyers ask
Can I get a mortgage with one year of self-employment?
Sometimes, if you worked in the same field for at least two years before starting your business and your income is stable. Many lenders still prefer two full years of returns.
How many years of self-employment do lenders need?
Usually two years, sometimes one if you were in the same line of work before.
Why is my qualifying income lower than my revenue?
Lenders start from taxable net profit, after business expenses, and add back only certain non-cash deductions.
What if my income dropped last year?
Lenders may use the lower year, or may need an explanation and proof that income has stabilized.