Calculating Self-Employed Income for Mortgage Qualifications

When determining the self-employed income for mortgage qualification, lenders usually take an average of the applicant’s income over a specific period. The NET INCOME (after all tax deductions/write-offs) is averaged out over 2 years to calculate self-employed income. However, if income is decreasing in the most recent year, only the most recent year’s net income is average out over 12 months.

Although there are cases where only 1 year of tax returns are used, lenders require a minimum two-year track record of self-employment to evaluate income stability. This may be a combination of 1 year of tax returns and LLC/DBA documentation showing the business has been in existence at least 2 years. If an individual has recently transitioned from employment to self-employment, their income history might not meet the lender’s criteria. In most cases, 2 years of tax returns are required.

In addition to the tax returns, self-employed individuals are often required to provide a year-to-date profit and loss statements (also known as income statements) for their businesses. These statements outline the revenues, expenses, and net income for a specific period. The purpose of this is to document the income stability has continued after the tax returns were completed.

Alternatives for Self-Employed Homebuyers
Certain types of self-employment may involve irregular or unpredictable income streams, making it difficult for lenders to assess the borrower’s ability to meet mortgage payments. For instance, income derived from freelance work or seasonal businesses might be viewed as less stable.

Self-employed individuals who do not maintain detailed financial records, such as accurate tax returns or financial statements, may face challenges in proving their income. Lenders typically require thorough documentation to verify income reliability.

If a homebuyer has issues documenting self-employment OR if their income calculations are not adequate, there are other loan options (bank statement, profit and loss, assets depletion loans) that may work. The downside is that these options have higher down payment and usually have a higher interest rate.

Although self-employed income can present challenges, it should not discourage aspiring homeowners from purchasing. With careful planning and organized record-keeping, self-employed individuals can successfully qualify for a mortgage and realize their dreams of homeownership.