There is a lot of misinformation about how to calculate self-employment income for a mortgage, so I wanted to go over the method used by underwriters and lenders across the U.S. This post will cover calculating income for Sole Proprietorship’s which are reported on Schedule C of your federal tax return. In follow up posts I’ll explain how to calculate income from C-Corps, S-Corps, and Partnerships.
First, a great resource to help calculate self-employment income can be found at https://www.radian.biz/page?name=SelfEmployedCFAnalyzer (that is a PMI company’s website, with a link to an Excel worksheet that you can just plug in numbers from the associated line on the tax return) and https://www.irs.gov/pub/irs-pdf/f1040sc.pdf is the 2021 IRS Schedule C.
For sole proprietorship/Schedule C…
- You take the net income/loss on line 31
- Deduct line 6 for other income (unless it’s recurring, if it is recurring then a detailed explained on what that “other” income is from and usually a statement from your CPA stating it’s expected to recur for the foreseeable future is needed)
- Add line 12 for depletion
- Add line 13 for depreciation (and vehicle depreciation included in part of the standard mileage deduction may be added back by multiplying the business miles driven on line 44a by the depreciation factor, which is $.26/business mile for 2019, $.27/business mile in 2020 and $.26/business mile in 2021),
- Deduct line 24b for deductible meals (since you only can claim 50% on your Schedule C, this is deducting the remaining 50%)
- Add line 30 for business use of home
- Add any amortization or casualty loss (reported on Part V of Schedule C, you write or type this in)
= total self-employment income from Schedule C.
If income is declining from one year to the next the most recent year income will be used, rather than a 2-year average. If the decline is severe enough then an underwriter may ask for a letter of explanation on why and ask for a current P&L to see how the newest year is going so far. There have been situations with declining income where none of the income can be used, due to the underwriter thinking it will continue to decline.
For self-employed individuals they are alternatives to qualify using tax returns, there are programs that will calculate income based on business income deposits over 3-, 12- or 24-month period of time or will use a Profit & Loss statement.
Please reach out if you need help obtaining a mortgage using self-employed income, we’re experts at www.thebesthomeloans.com and are happy to help!
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