How to calculate self-employment income for a mortgage loan?
Add up all your income for the previous two years and then divide that number by 24 to see your gross monthly income. To count as income for your lender, your income should come from a source that's at least two years old — and you should have proof you expect the income to continue at least three more years.
- Find your net profit before taking exemptions or paying taxes (from Schedule C of your tax return) for the two most recent years you filed taxes.
- Add these two figures together.
- Divide the total by 24.
To calculate self-employed mortgage loan income during the mortgage process, lenders typically average your income over the past two years and break it down by month.
Income Documentation
Your lender will ask for the following: Personal tax returns (including W-2s if you're paid through your corporation, partnership or sole proprietorship) Business tax returns (which may include a Schedule C, Form 1120-S or K-1, depending on your business structure)
Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business.
Lenders don't look at your gross income or revenue — the amount you bring in before expenses and other deductions. They also don't use your adjusted gross income on your tax return. Instead, they look at your net business income — the amount you bring in after you subtract relevant business expenses.
Bank statement loans are calculated by an underwriter who will add the total amount of your bank deposits for 12 or 24 months. This total is then divided by 12 or 24 respectively to determine your average monthly income to see if you qualify for the home loan.
The lender may verify a self-employed borrower's employment and income by obtaining from the borrower copies of their signed federal income tax returns (both individual returns and in some cases, business returns) that were filed with the IRS for the past two years (with all applicable schedules attached).
Tip. To calculate gross income, add up your total sales revenue, then subtract any refunds and the cost of goods sold. Add in any extra income such as interest on loans, and you have your gross income for the business year.
Income, asset and employment verification
This is when the lender's underwriter checks your credit and financial situation to confirm you're capable of repaying the loan and also verifies your employment. You'll need to submit documents such as W-2s, pay stubs and bank statements for verification.
How do I prove self employment income for a loan?
- Annual Tax Return (Form 1040) This is the most credible and straightforward way to demonstrate your income over the last year since it's an official legal document recognized by the IRS. ...
- 1099 Forms. ...
- Bank Statements. ...
- Profit/Loss Statements. ...
- Self-Employed Pay Stubs.
The Income Verification Express Service (IVES) program lets participants, mortgage lenders, banks, credit unions and others, request taxpayer authorization for the IRS to provide tax transcripts and wage statements in the loan application process.
It's possible to get approved for a personal loan when you're self-employed, but lenders will likely put your finances under a microscope to make sure you earn enough income to keep up with payments.
Determine your self-employment tax base. Multiply your net earnings by 92.35% (0.9235) to get your tax base: $50,000 x 92.35% = $46,175. Calculate your self-employment tax. Multiply your tax base by the self-employed tax rate: $46,175 x 15.3% (0.153) = $7,064.78.
The deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
Self-Employment salaries range between $47,000 a year in the bottom 10th percentile to $148,000 in the top 90th percentile. Self-Employment pays $40.53 an hour on average. Geographic location also impacts Self-Employment salaries. Self-Employment employees in New York, NY get paid the most.
- Interest or dividends from investments.
- Income from rental property.
- Alimony or child support.
- Money earned from a part-time job or side business (provided you've earned the income for at least the past two years)
- Income from a pension, retirement account or Social Security benefits.
- The last six months of 1099 income, less if 1099 income is from most recent employer.
- Documentation of year-to-date income.
- 680 minimum credit score.
- Minimum 10% down with mortgage insurance approval.
- Minimum loan amount of $175,000 required to apply*
To level the playing field, lenders can increase non-taxed income, usually by 25%, to account for the fact that taxes are not paid. For example, $1,500 per month in non-taxable income would be considered $1,875 as far as mortgage qualification. Here's an example on how that adjustment can help.
Using personal bank statements to qualify for a mortgage instead of W2s might be a good loan option if: You don't have traditional tax documents to verify your total income. You have tax documents, but due to write-offs, your income looks smaller than it really is.
How do companies verify self-employment?
Independent contractors can use employment verification letters to show when they worked for a particular company, what their duties were and what they were paid. This letter can also be submitted with pay stubs, tax returns or bank statements as employment confirmation for independent contractors.
Acceptable verification includes: A signed contract specifying this. A 1099 (Miscellaneous Income) form issued by the business. A narrated conversation with the employer.
When trying to determine whether you have the means to pay off the loan, the underwriter will review your employment, income, debt and assets. They'll look at your savings, checking, 401k and IRA accounts, tax returns and other records of income, as well as your debt-to-income ratio.
Per definition, gross income is the total amount you earn, and net income is actual business profit after expenses and allowable deductions are taken out.
| Annual Salary | Monthly Pay | |
|---|---|---|
| Top Earners | $36,515 | $3,042 |
| 75th Percentile | $35,500 | $2,958 |
| Average | $30,577 | $2,548 |
| 25th Percentile | $29,600 | $2,466 |
