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Here’s How to Calculate Self-Employed Income For A Mortgage

Qualifying for a mortgage is a little more complex for those who are self-employed. Read on to learn more about how to calculate self-employment income and review a few tips for ensuring your application gets approved.

Amanda HoeyReviewed by

Coined The Great Resignation, a record-breaking number of American workers have left their conventional employment behind since the start of the pandemic. Whether it’s due to low wages or a lack of upward momentum, an estimated 4.4 million workers quit their jobs in September of 2021 alone, and some of these workers are looking to self-employment as a viable alternative.

According to a recent Gallup report, just over 28% of the American workforce reported being self-employed at some point during 2019, and data suggests this trend will likely continue into the foreseeable future.

If you work for yourself and are interested in buying a home, you’re likely wondering how to calculate self-employed income for mortgage purposes. Take a few moments to learn more about proving your self-employment income to lenders and review some helpful tips for ensuring your mortgage application gets approved.

What You Need to Prove Self-Employment Income for a Mortgage

In general, demonstrating self-employed income to buy a house is a little more complicated than the application process for conventional W-2 employees. Most lenders will want to see at least two consecutive years of income from self-employment, but some may accept only one year of income if you have previous experience working in a similar capacity for two years or more.

The easiest way to prove your income is with business and personal tax return statements. In some cases, mortgage lenders may require additional documentation to process your application, including 90 days of bank statements and a profit and loss statement. Bear in mind that if your business is an s-corporation, corporation, or a partnership, mortgage lenders will likely request a copy of your business license as well. In addition, lenders may require a CPA-certified letter stating that you are actively working and all financial documents provided are entirely accurate.

How to Calculate Self-Employed Income for a Home Mortgage

Since self-employment income may vary according to seasonal demand or other factors, lenders like to see that you’ve remained steadily employed for at least two years. To calculate your income, simply add your net profit from your Schedule C tax documents and divide the grand total by 24 months. This will generate a precise estimate of your monthly taxable income.

Next, you’ll want to deduct any recurring debt payments from your estimated monthly income to determine how much you can afford to pay on mortgage payments. For example, if you make $4,000 per month but pay $2,000 a month to service credit card debt or a loan, lenders will assume you only have $2,000 leftover to go toward a mortgage payment. This would put your debt-to-income ratio at 50%, which could be a little high for some lenders. Ideally, your DTI ratio should never exceed 40% if you’re trying to qualify for a mortgage.

It’s important to note that any tax deductions you take throughout the year will lower your overall taxable income, thus reducing the amount of money you can borrow. To ensure you have enough self-employment income to buy a house, always keep track of your revenue streams and report any earnings to the IRS.

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Tips for Acquiring a Home Mortgage if You’re Self-Employed

It’s not difficult to learn how to calculate self-employment income for a mortgage, but getting approved can be a challenge, especially in today’s unpredictable housing market. You can improve your chances by staying informed on how the mortgage process works and what options are available to you as a self-employed individual. Here are some simple tips that can help the search for a mortgage a little easier.

Increase your Credit Score

Like with any loan, lenders always consider a borrower’s credit history when reviewing a mortgage application. You are far more likely to get approved if you possess a credit score of 580 or higher. You can improve your credit score gradually by paying bills on time and eliminating any existing debt from credit cards or other loans. The higher your score goes, the more attractive you will appear to mortgage lenders.

Keep your Financial Documents Organized

Collect all the documentation needed to substantiate your self-employment income ahead of your discussion with a mortgage lender. Most lenders will request tax returns for the previous two years, although one year of business income may be sufficient if you’ve remained in your current line of work for five years or more. In addition, be sure to collect financial statements pertaining to secondary income streams and any recurring monthly expenses, like your current mortgage or rent payment.

Explore All your Mortgage Options

There are several types of mortgages available to self-employed individuals, so take your time to find the best option for you. If you can afford a small down payment and have never owned a home before, consider taking out a conventional mortgage or FHA mortgage. A VA loan is an excellent option for self-employed veterans due to its affordable interest rates and flexible approval criteria. You can also look into taking out a USDA loan if you’re interested in purchasing a rural property but would prefer to avoid putting up a down payment.

Keep Business and Personal Checking Accounts Separate

You may be able to expedite the mortgage approval process by ensuring your personal income and business income remain in different accounts. Create a business checking account to receive all your payments throughout the year so lenders can quickly see how much you earn without needing to filter through a bunch of unrelated transactions. Opening a business checking account will also give your self-employment more credibility in the eyes of lenders.

If you’re already paying a mortgage and are interested in converting your home’s equity to cash, EasyKnock can help. With our sale-leaseback programs, you can sell your home to us, converting your equity into cash, while continuing to live in your house as a renter. If you ever decide you want to own the home again, you can choose to purchase the home at any time. Visit us online today to learn more.

Amanda Hoey
Content Marketing Manager

Amanda Hoey, Content Marketing Manager for EasyKnock, has applied her experience in public relations and content development to help produce educational and informative content for the financial and real estate industry. She is committed to bringing awareness and knowledge to homeowners about EasyKnock’s home equity loan alternative.

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