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Income used for self employed borrower qualify mortgage

I am a self-employed business owner looking to apply for a mortgage to buy a home. My business made a good amount of money this year but little money two years ago. In this case, what income do lenders use to determine what size mortgage I can afford?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

If you are self-employed, such as if you own your own business, lenders usually use your average monthly income for the prior two years to determine what size mortgage you can afford. For example, if your business earned $10,000 last year and $70,000 this year, most lenders add the income for the prior two years, so $80,000 in total income over the two year period, and divide by 24 months to arrive at $3,333 in monthly income ($80,000 / 24 months = $3,333). This assumes that your sole source of income is profit from your business and that you are not taking any salary from the business. The lender then uses this monthly income figure as as well as other factors such as your monthly debt expense and credit score to determine how much mortgage you can afford.

For example, based on a monthly income figure of $3,333, no monthly debt and a good credit score, you can afford a mortgage of approximately $250,000. You can use our Mortgage Qualification Calculator to determine what size mortgage you can afford based on different monthly income and debt inputs.

Because the income from your business increased so significantly in this year as compared to last year, the mortgage qualification method most lenders use for self-employed borrowers puts you at a disadvantage. This means that the mortgage you can qualify for today is likely significantly lower than the mortgage you can financially afford based on the current performance of your business. This is one reason why getting a mortgage can be more challenging when you are self-employed. Additionally, most lenders require self-employed borrowers to provide two years of business tax returns. We provide a comprehensive explanation of How to Get a Mortgage If You are Self-Employed on FREEandCLEAR for you to review.

Ultimately, the question becomes what size mortgage you need to buy the house you want. If you are comfortable with a lower mortgage amount then you can move forward based on the prior two years of performance for your business. If you want a larger mortgage amount, then you may need to wait longer before you apply for your mortgage or shop lenders to find one that has more flexible qualification requirements for self-employed borrowers. For example, you may be able to find a lender that uses one year of income instead of two to determine what size mortgage you qualify for, although this approach is relatively uncommon and usually requires borrowers to pay a higher interest rate.

We recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as lender guidelines for self-employed borrowers can vary.

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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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