How Is Self-Employment Income Calculated for a Mortgage?

Mortgage lenders generally calculate self-employment income by reviewing tax returns and other business records, identifying stable income available to the borrower and determining whether that income is likely to continue. The amount used to qualify may be different from gross revenue, taxable income or the amount deposited into a business account. 

A lender does not normally qualify a self-employed borrower based solely on the business’s total sales or the amount shown on a recent bank statement. Instead, the lender evaluates the borrower’s ownership, business structure, earnings history, expenses, income trends and access to business income. Depending on the mortgage program, the calculation may include information from:

• Personal federal income tax returns 
• Business federal income tax returns 
• IRS Schedule C, Schedule E or Schedule K-1 
• Year-to-date profit-and-loss statements 
• Business balance sheets 
• Business and personal bank statements 
• 1099 forms or other third-party income records 
• Documentation showing that the business remains active

The lender may then make underwriting adjustments based on the applicable loan guidelines. The final figure is commonly called qualifying income. It may be higher or lower than the number a borrower informally considers their monthly income.

Mortgage guidelines often consider a borrower self-employed when the borrower owns a significant share of a business and receives income from that business. Fannie Mae, for example, defines a borrower with an ownership interest of 25% or more as self-employed for underwriting purposes.

Self-employed borrowers can include: 

• Sole proprietors 
• Independent contractors 
• Freelancers and consultants 
• Gig-economy workers 
• Partners in a partnership 
• Owners of an S corporation or C corporation 
• Limited liability company members 
• Borrowers receiving substantial 1099 income 
• Business owners who also receive a W-2 from their company

Owning a business does not automatically prevent someone from getting a mortgage. It usually means that the income requires a more detailed review than the income of a borrower receiving a fixed salary from an unrelated employer.

One of the most important concepts for a self-employed borrower is the difference between business revenue and personal qualifying income.

Tax returns help a mortgage lender understand how the business generates income, how much income reaches the borrower and whether the earnings appear stable. The forms reviewed depend on the structure of the business.

A sole proprietor commonly reports business income and expenses on IRS Schedule C. The lender may review net profit, recurring expenses and permitted adjustments to determine an eligible monthly income amount.

A partnership may file IRS Form 1065 and issue Schedule K-1 forms to its partners. The lender may consider the borrower’s ownership percentage, distributions, guaranteed payments, business liquidity and whether the borrower has access to the income being used. 

An S corporation generally files IRS Form 1120-S and may issue Schedule K-1. A business owner may also receive W-2 wages from the company. The lender may need to evaluate both sources while avoiding the double counting of income.

A C corporation generally files IRS Form 1120. A borrower may receive wages, dividends or other eligible income from the corporation. The lender may also evaluate whether using business income could negatively affect the company’s financial condition.

They can. Tax deductions may reduce the net income reported on a borrower’s tax returns. That can create a situation in which a successful business owner has strong cash flow but reports a lower amount of taxable income. Certain expenses may receive different treatment under applicable underwriting guidelines. For example, some documented noncash expenses may potentially be added back during the analysis, while recurring obligations and actual business losses may reduce the income available for qualification. A borrower should not assume that every deduction will be added back. The treatment depends on the tax form, expense, documentation, business structure and mortgage program.

A two-year history is commonly used because it helps demonstrate that the borrower has an established record of earning income from the business. The lender will generally look for stable or improving income and may closely review a significant decline. Having less than two years of self-employment does not necessarily create an automatic denial. Under certain conventional guidelines, a borrower with at least 12 months of self-employment may be considered when the borrower has a prior history of earning similar income in the same or a related occupation and satisfies the remaining requirements. Eligibility depends on the complete loan profile, supporting documents, automated-underwriting findings, loan program and lender requirements.

The lender may review one or two years of eligible income and convert the accepted annual amount into a monthly figure. A simple illustration looks like this:

Illustrative example only 

• Eligible Year 1 income: $84,000
• Eligible Year 2 income: $96,000
• Two-year total: $180,000
• Monthly average: $180,000 ÷ 24 = $7,500

The actual analysis may be more complex. If earnings have declined, the lender may use a more conservative amount, require an explanation or determine that the income is not sufficiently stable. A higher recent year does not always mean the lender will use only that higher amount.

Document requirements vary, but a self-employed mortgage applicant may be asked to provide some combination of the following:          

• One or two years of personal federal income tax returns 
• One or two years of applicable business tax returns 
• IRS tax transcripts or authorization to obtain them 
• A current year-to-date profit-and-loss statement 
• A current business balance sheet 
• Recent personal and business bank statements 
• Business license, professional license or registration 
• CPA or accountant documentation 
• 1099 forms and year-to-date earnings records 
• Evidence that the business remains active 
• Documentation explaining unusual deposits or significant income changes 

The Consumer Financial Protection Bureau advises borrowers with self-employment, irregular or nonwage income to expect more extensive income documentation and to ask their lender which records are required for their situation.

Some borrowers may have strong and consistent business cash flow even though their tax returns do not support the qualifying income needed for a traditional mortgage. In certain circumstances, an eligible bank-statement mortgage or another expanded mortgage program may provide an alternative method of evaluating income. Instead of relying entirely on conventional tax-return calculations, an eligible program may review qualifying deposits over a specified period and apply an expense factor to estimate income. Program terms can vary substantially based on:       

• Number of bank-statement months reviewed 
• Personal versus business accounts 
• Consistency and source of deposits 
• Applicable business expense factor 
• Credit history 
• Down payment or equity 
• Property type and occupancy 
• Available financial reserves 
• Loan amount and state availability 

Guild offers expanded mortgage programs with alternative income-verification options that may help qualifying self-employed borrowers, freelancers, gig workers and people with nontraditional income sources. Expanded and non-qualified mortgage programs may have different rates, costs, documentation and eligibility standards than conventional, FHA, VA or USDA loans. A loan officer can help compare the available options.

• Keep business and personal finances organized. Separate accounts can make income and expense documentation easier to review.
• Prepare current financial statements. Maintain an accurate year-to-date profit-and-loss statement and balance sheet.
• Review recent tax returns. Understand the income, losses and deductions that appear on the returns before beginning the application.
• Avoid unexplained transfers and deposits. Keep records supporting large or unusual transactions.
• Preserve liquidity. Down-payment funds, closing costs and financial reserves may affect the available loan options.
• Discuss income changes early. Explain recent growth, declines, business changes or changes in ownership to the loan officer.
• Compare more than one mortgage path. A conventional mortgage, government-backed loan or expanded program may calculate income differently.

Self-employed borrowers may qualify for many of the same home loans available to salaried borrowers, provided they meet the program requirements. Potential options may include:        

• Conventional mortgages 
• FHA loans 
• VA home loans for eligible service members, veterans and surviving spouses 
• USDA loans for eligible borrowers and properties 
• Jumbo mortgages 
• Bank-statement and other expanded mortgage programs 

The most appropriate option depends on the borrower’s income documentation, credit, debts, down payment, reserves, property and financial goals.

Lenders generally review tax returns and supporting business records, identify income available to the borrower, make permitted underwriting adjustments and determine whether the income is stable and likely to continue.

It may be possible under certain loan guidelines when the borrower has at least 12 months of self-employment, a related prior work history and sufficient supporting documentation. Approval is not guaranteed and depends on the complete application.

Lenders generally do not use the business’s entire gross revenue. They analyze net income and other eligible amounts, then apply adjustments under the applicable underwriting guidelines.

Deductions can reduce taxable and qualifying income. Certain documented noncash expenses may receive different treatment, but not every deduction can be added back.

Certain expanded mortgage programs may allow qualifying bank-statement deposits to be used as an alternative income-verification method. Program availability and requirements vary.

Yes. Freelancers and 1099 workers can qualify when sufficient stable income, credit, assets and other loan requirements are documented.

Self-employment can make mortgage documentation more detailed, but it does not have to prevent homeownership. Guild Mortgage offers conventional, government-backed and expanded mortgage options for a range of borrower circumstances. Connect with a Guild loan officer to discuss your income, documentation and available mortgage programs.

Fannie Mae: Underwriting Factors and Documentation for a Self-Employed Borrower 

Freddie Mac: Self-Employed Income Guidelines 

Consumer Financial Protection Bureau: Gather and Update Your Paperwork 

Guild Mortgage: Expanded Mortgage Programs 

This article is provided for educational purposes only and is not a commitment to lend, tax advice, legal advice or a guarantee of loan approval. Mortgage programs, income calculations, rates, terms, documentation and eligibility requirements are subject to change and may vary based on the borrower, property, loan program and applicable underwriting requirements. All loans are subject to application, verification, underwriting and approval. Consult a qualified tax professional regarding tax matters.

Guild Mortgage Company; Equal Housing Opportunity; Company NMLS ID 3274. Licensing and product availability vary by state.