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How To Calculate Self-Employed Income For Mortgage Loans

Last updated 03/15/2024 by

Jamela Adam

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Unlike W-2 employees, self-employed individuals like business owners, freelancers, or gig workers often need to provide additional paperwork to demonstrate their financial credibility when applying for a mortgage. While calculating your self-employed income could be tricky depending on your situation, understanding what lenders are looking for can make navigating the mortgage application process a bit smoother.
The gig economy is thriving. According to the Freelance Forward report released by Upwork: 59 million Americans — more than one-third of the U.S. workforce — took control of their careers by starting their own businesses or working as freelancers in 2021. And around 74% of freelancers surveyed said freelancing gives them the flexibility to spend time with their family and do the things they love.
However, while self-employment offers a lot of freedom and potential income, it can also complicate the home-buying process. Unlike traditional employees, self-employed individuals don’t receive a regular paycheck or W-2 form come tax time. Plus, when you work for yourself, your income tends to be much less predictable, which could make calculating your income for your mortgage application trickier. But don’t worry. Getting approved for a mortgage when self-employed is still possible.
Here’s everything you need to know about calculating your self-employed income so you can confidently navigate the mortgage application process as a self-employed individual.

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How to calculate your self-employed income for mortgage loan applications

When mortgage lenders review your self-employed income, they consider your net earnings from the past two years.
Let’s say after deducting business expenses like utilities and office supplies; you made $55,000 in your first year and $105,000 in your second year. The income mortgage lenders will use for determining your eligibility is the average of the two, which is $(55,000 + $105,000)/2 = $80,000. Or $6,666 per month.
However, if your self-employed income declines from year one to year two, things may be more complicated. For example, if you made $105,000 in your first year freelancing and only $55,000 in your second year, the lender might not average your income over the past two years. Instead, they’ll only acknowledge your second-year income of $55,000 and divide it by 12 to determine your monthly income, which is $4,583.

What types of income do mortgage companies consider for self-employed borrowers?

When you apply for a mortgage, lenders will scrutinize your income to ensure you can make monthly payments without defaulting. For this reason, lenders want proof of steady and consistent income from potential borrowers.
The sources of income for self-employed borrowers could include:
  • Fees earned through freelance work or gig work
  • Consulting fees
  • Interest payments and dividends
  • Revenue from a business
  • Rent from investment properties
Note that these sources of income must be continuing and not just a one-time payment.

Ways to provide proof of income

  • Two years of personal tax returns. Including forms such as 1040, Schedule C, and Schedule SE.
  • One to two years’ worth of bank statements. If you use one bank account for all your personal and business banking, highlight all the business-related payments.
  • Two years of business tax returns. Including schedules K-1, 1120, and 1120S.
  • Year-to-date profit and loss statement. The P&L statement summarizes the total income and expenses of your business. Consult a certified public accountant (CPA) to help you prepare this document accurately.
  • Balance sheet. This financial statement provides a balance of your assets and liabilities, giving lenders a picture of your financial health and ability to repay the loan.

Do mortgage lenders use gross or net income for self-employed

Lenders typically consider your net income — the amount you earn after subtracting relevant business expenses — when determining your eligibility for a mortgage. For example, if you’re self-employed, you likely have to fill out an IRS Schedule C to report how much your business has made or lost during the year.
When filling out the form, you’re asked to deduct business expenses like office supplies and utilities from your total gross income. The amount you have left over after deducting those expenses is considered your net income, which is what mortgage lenders look at.

What you should know as a self-employed borrower

Here are a few things you must know about applying for a mortgage as someone who’s self-employed.

Be careful with how much you deduct

One piece of advice licensed mortgage broker David Krebs has for self-employed borrowers is to be cognizant of the impact of deductions on your taxable income.He says: “While it may seem advantageous to significantly lower your tax burden by maximizing business expense deductions, such a strategy can inadvertently reduce your demonstrable income. Because for mortgage lending purposes, your taxable income forms the basis for evaluating your debt-to-income ratio, not your gross revenue.” To increase your odds of mortgage approval as a self-employed individual, Krebs suggests keeping your business write-offs to under 40% of your income.

Boost your credit score

Besides your annual income as a self-employed borrower, lenders will also check your credit score to determine your creditworthiness. The higher your credit score, the better. Before submitting your mortgage application, take steps to boost your credit score by paying bills on time and maintaining a low credit utilization. While credit score requirements may vary depending on the lender, a score of 740 or higher can typically qualify you for the best rates.

Plan for a larger down payment

Some lenders may view self-employed borrowers as riskier than W2 employees due to potential income fluctuations. So, if your budget allows, consider putting more money down upfront. Here’s why: A larger down payment helps lenders offset the potential risk of lending to you. Simply put, if you default on the loan, they’ll lose less money since you’ve already paid a good chunk of change upfront for the property.
PRO TIP – Having a high score shows lenders you’re creditworthy and responsible with your finances. To ensure your credit looks good before submitting a mortgage application, get a free copy of your credit reports from the three credit bureaus at If you spot any inaccuracies in your reports, file a dispute immediately.


How do you calculate self-employed income for mortgages?

To calculate your self-employed income for mortgages, first, find your net income from Schedule C on your tax returns for the last two years. Then, add those two figures together and divide the total by 24. The result is your average monthly income as a self-employed person.

How do I calculate my annual income if I am self-employed?

If you’re applying for a mortgage as a self-employed person, you can calculate your annual income by adding your net income for the most recent two years and dividing the total by two. For example, if your net income for year one was $70,000 and year two $135,000, your income for a qualifying mortgage would be ($70,000 + $135,000)/2 = 102,500.
Note that if your income has been declining (Ex: Year one $135,000 and year two $70,000), lenders may be hesitant to approve you for a mortgage loan since it indicates you may have trouble keeping your business afloat.

Do lenders use gross or net income for mortgages for self-employed?

Most lenders analyze your self-employed income based on Fannie Mae’s cash flow analysis Form 1084, and the exact method they use could vary depending on your business structure — whether it’s a sole proprietorship, partnership, or corporation.
But generally, most lenders will look at your net income, which is your gross income minus business expenses, to determine your eligibility.

Is it hard to get a mortgage if you are self-employed?

Being self-employed doesn’t directly hinder your chances of getting mortgage approval. However, you may have to provide extra documents to prove your financial stability. Lenders typically hold self-employment income to a higher standard and will need at least two full years of income history. So, if you just started working for yourself, it’s best to wait a few years before applying for a mortgage to increase your chances of getting approved.

Who is considered a self-employed individual?

A self-employed individual is anyone who works for themselves and is not an employee of an organization or company. Examples of self-employed individuals include freelancers, independent contractors, sole proprietors, and business owners (those with 25% or more ownership of a business). One major difference between a self-employed individual and a traditional employee is that the former is responsible for paying their own taxes, while most W-2 employees receive their paychecks with taxes already deducted.

Which lenders provide mortgages for self-employed individuals?

Most mortgage lenders work with self-employed borrowers. As long as you can prove your financial stability by showing two years of steady self-employment history, your borrowing experience shouldn’t differ much from anyone else’s.

Can you qualify for a mortgage without two years of work history?

You’re unlikely to qualify for a mortgage without two years of work history as a self-employed person. But there’s an exception: If you can demonstrate a two-year track record in a similar line of work, you may still qualify even with just a year of being self-employed. For example, if you worked one year as a content writer in a marketing agency and transitioned into a freelance writer afterward. Of course, every mortgage lender has their own requirements, so check with them before submitting your application.

Key Takeaways

  • Mortgage lenders consider net earnings from the past two years when reviewing self-employed income for mortgage loan applications.
  • Common self-employed income includes freelance work, consulting fees, interest payments, dividends, revenue from a business, and rent from investment properties.
  • Self-employed individuals can provide personal tax returns, bank statements, business tax returns, year-to-date profit and loss statements, and balance sheets to show proof of income.
  • Self-employed borrowers should be mindful of how many deductions they take, as it could lower their taxable income and affect their eligibility for a mortgage.
So, if you tend to maximize your self-employed tax deductions on your annual returns, you may want to think again this tax season — especially if you’re planning to buy a home soon. Skipping some of those deductions may help increase your odds of getting approved for a mortgage as a self-employed borrower since you’ll have more income to show potential lenders. And before shopping for your dream abode, get quotes from various lenders so you have a better idea of what price range your home should be in.
Check out our list of the best mortgage lenders when you’re ready to get your first preapproval letter.

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