Guide: Understanding Self-Employed Income for Home Loan Qualification

When applying for a home loan as a self-employed individual, lenders calculate your qualifying income based on your tax returns, adjusting for certain deductions. Here’s a quick guide to what lenders typically add back to your income and what they do not.

Add-Back Allowable Deductions (Non-Cash or One-Time Expenses):

Depreciation: Non-cash expense for assets like vehicles or equipment (e.g., from Schedule C, Line 13).

Depletion: Non-cash reduction of natural resources (e.g., from Schedule C, Line 12).

Amortization of Intangible Assets: Non-cash expense for items like patents or goodwill.

One-Time, Non-Recurring Expenses: Unusual expenses such as legal fees from a single lawsuit.

Business Use of Home (Line 30): Only the depreciation portion is added back, as it’s a non-cash expense.

Deductions Lenders Do NOT Add Back:

Meals (Line 24b): Considered a real business expense.

Utilities, Insurance, and Maintenance (Part of Home Office Deduction): Real, recurring business costs.

Payroll Expenses: Actual labor costs for employees.

Business Travel: Real cash expense.

How Lenders Calculate Adjusted Income:

• Start with net income from your tax return (Schedule C or business tax returns).

• Add back allowable deductions (non-cash or one-time items).

• Subtract non-eligible income adjustments (e.g., capital gains or investment income).

• Average the adjusted income over the past 2 years (unless the most recent year is lower).
  
  Example:

Net Income (Schedule C): $80,000

Depreciation (Add Back): +$5,000

Business Use of Home Depreciation (Add Back): +$2,000

One-Time Legal Expense (Add Back): +$3,000

Adjusted Income: $90,000

This guide can help you better understand how lenders view self-employed income and prepare your financial documents for a smoother home loan process.
Navigating the world of self-employment and home loans can be tricky, but understanding how lenders evaluate your income is key. This guide is a great starting point, but every financial situation is unique. If you're self-employed and ready to explore your homeownership options, I'd love to help you navigate the process.
Contact me today at  realtor@stephaniehernandez.com for a personalized consultation. Schedule a consultation now and  let's discuss your specific circumstances and find the perfect mortgage solution for you!