How do lenders calculate self-employed income?
Answered by Onias Derilus, Mortgage Capital · NMLS# 1859012 · Florida licensed mortgage broker
With tax returns, lenders use your net business income averaged over two years, adding back certain non-cash deductions like depreciation. Declining income gets averaged down; growing income may use the lower year to be conservative.
With a bank statement loan, they average your deposits and apply an expense factor instead. We'll calculate your income both ways and use whichever qualifies you for more.
Net income, averaged
For standard loans, lenders take your net income from your tax returns, add back certain non-cash deductions like depreciation, and average it over two years. That average becomes your qualifying income.
Because they use net income, heavy write-offs lower the figure you can qualify with, even if your business brings in a lot of cash.
Alternatives that use gross
Bank statement loans use a share of your total deposits instead of net income, which often qualifies you for more. 1099 loans use your gross 1099 earnings.
The right method can change your budget dramatically. Reach out and we will calculate your income every way and use the best one.