How lenders calculate self-employed income for a mortgage

Why self-employed income is different

A salaried borrower has a pay stub. A self-employed borrower has tax returns, and tax returns are built to reduce taxable income. That is good for your tax bill and can work against you at a lender.

The basic method

Underwriters look at your net income on your returns, usually for the last two years, and average it. They also look at the trend. Income that is steady or rising is read very differently from income that dropped sharply in the most recent year.

What they add back

Some deductions are not real cash leaving your business. Guidelines commonly allow lenders to add back items such as depreciation, depletion, amortization, and the business use of your home. The specifics depend on the loan program.

How different income types are read

• Schedule C (sole proprietor): net profit from the business is the starting point.
• 1099 contractor: usually shows up on a Schedule C, so the same method applies.
• K-1 (partnership or S corporation): lenders look at your share of income and, in some cases, whether the business has the cash to support distributions.

What to gather

• Two years of personal and business tax returns
• A year-to-date profit and loss statement
• Recent business and personal bank statements

Send documents through a secure portal, never by email.

Timing matters

Writing off more expenses lowers your tax bill and your qualifying income at the same time. If you plan to buy soon, talk with a loan officer before you file, so you understand the tradeoff while you still have choices. A loan officer cannot give tax advice, so involve your CPA as well.

See the self-employed page for more, and start with pre-approval once you know what to expect.