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How Self-Employed Income is Calculated for a Mortgage

How do lenders calculate self-employed income for a mortgage?

Michael Jensen
, Mortgage and Finance Guru
Edited by Harry Jensen

When you apply for a mortgage lenders look at your monthly gross income and debt expenses to determine the loan you qualify for. The higher your income and lower your debt payments, the higher the mortgage amount you can afford.

Calculating your monthly gross income if you are self-employed can be a little tricky because your income may fluctuate month-to-month or year-to-year. Additionally, If your business is seasonal, your income may vary significantly over the course of the year.

To account for these potential variations, for standard mortgage programs lenders typically calculate your self-employment income by averaging your monthly income for the previous two years. Lenders usually require that you provide your tax returns for the prior two years to verify the annual income figures they use.

Review How to Get a Mortgage if You Are Self-Employed

For example, if you earned $70,000 in self-employed income last year and $60,000 the prior year, the lender adds the income for both years -- so $130,000 in total income over the two year period -- and divides by 24 months to arrive at $5,415 in average monthly gross income ($130,000 total income / 24 months = $5,415 per month).

If you have other verifiable income sources such as part-time work or investments, the lender adds that monthly income to your self-employment income to determine the mortgage you qualify for. Other factors including your personal debt expenses, credit score and loan terms also impact the mortgage you can afford.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the mortgage you can afford based on your self-employed income

There are a couple of points to highlight given the way self-employed income is calculated when you apply for a mortgage. First, if your income has increased significantly recently, you usually do not receive the full benefit from the higher income.

For example, if you currently earn $8,000 a month on a steady basis but your average monthly self-employment income over the past two years is only $5,500, the lender uses the $5,500 income figure to evaluate your mortgage application. Using an average income figure that is lower  than your current actual income puts self-employed borrowers at a potential disadvantage.

Additionally, many self-employed people try to minimize the income they show on their tax returns to reduce their tax bill. While this strategy offers benefits from a tax standpoint, reporting a lower income figure can significantly reduce the mortgage amount you qualify for.

Self-employed borrower qualification requirements may vary by lender and loan program. We recommend that you contact multiple lenders in the table below to understand the mortgage you qualify for as a self-employed applicant. Shopping lenders also enables you to find the best mortgage terms.

Current Mortgage Rates in Ashburn, Virginia as of May 22, 2024
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Rate data provided by Displayed by ICB, a division of Mortgage Research Center, NMLS #1907, Equal Housing Opportunity. Payments do not include taxes, insurance premiums or private mortgage insurance if applicable. Actual payments will be greater with taxes and insurance included. Read through our lender table disclaimer for more information on rates and product details.

Please note that the self-employed income guidelines outlined above apply to standard mortgage programs such as conventional and FHA loans. Another option for self-employed applicants is a bank statement mortgage program.

As the name suggests, a bank statement loan enables you to qualify for a mortgage based on your bank statements instead of your tax returns. In short, deposits into your bank account serve as income when you apply for the mortgage.

As long as regular deposits appear on your bank statements, you should be able to qualify for the loan assuming the deposits enable you to afford the monthly payment, property tax and insurance. The more steady the deposits and income, the better from the lender's standpoint.

Review How a Bank Statement Mortgage Works

Many programs only require twelve months of bank statements to verify your income although some programs require 24 months. In many cases you can qualify for a higher mortgage amount using your bank statements than your tax returns, which is why this program is popular with self-employed borrowers.

The negatives of a bank statement mortgage are that you usually pay a higher interest rate and other qualification requirements can be more challenging. For example, you may be required to make a higher down payment or have a higher credit score.

Additionally, if you own your own business, you may be required to provide both personal and business bank statements as well as detailed financial information about your business. We recommend that you confirm the documentation requirements before you select a lender.

You can use the FREEandCLEAR Lender Directory to search for lenders by state, lender type and loan program. For example, you can search for top-rated lenders in your state that offer bank statement mortgages.



"B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, December 4 2018.  Web.

"B3-3.4-01, Analyzing Partnership Returns for a Partnership or LLC."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, June 5 2019.  Web.

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About the author
Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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