How Are Self-Employed Incomes Calculated for Mortgages?

Here’s how we calculate income for self-employed individuals.

Recently, many self-employed clients have asked me how their incomes are calculated when they apply for a mortgage. Today I want to go over this process with you. 

The first thing we do is run an approval. This will determine whether we need one or two years of tax returns, depending on the overall risk of the borrower. Once we have your tax returns, we’ll look at your net profit—the same number you use to pay your taxes. Then, we take this number from the last calendar year and divide it by 12 or 24, based on how many years of tax returns we have. Now we have a rough estimate of your monthly income. Sometimes we can make adjustments, but in general, we base our mortgages on your net income. 

After we have your net income, we look at your total expenses. These include every expense that currently exists on your credit report, such as auto loans, student loans, personal loans, etc. We also have to add in the expense of your new home, which will include the mortgage, taxes, home insurance, and mortgage insurance if it’s necessary. 

From here, we divide your total expenses by your total income to get your debt-to-income ratio. Usually, lenders are looking for a maximum debt-to-income ratio of 40% to 45% for a conventional loan. This isn’t the only option, so if you’d like to know more, just reach out. 

If you have any questions about today’s topic, please call or email me. I am always willing to help!