How Lenders Calculate Self-Employment Income
The formula underwriters use to determine your qualifying income.
Understanding how lenders calculate self-employment income is crucial for setting realistic expectations about how much house you can afford.
Lenders start with your net profit from Schedule C (for sole proprietors) or your K-1 income (for S-corps and partnerships). They then add back certain non-cash deductions like depreciation and depletion.
If your income has increased year-over-year, lenders typically use the lower of the two years or an average. If your income has declined by more than 20%, they may use only the most recent year or ask for additional documentation.
The key takeaway: your qualifying income is almost always lower than your gross revenue and often lower than what you feel you 'actually make.' Plan accordingly.