How do Mortgage Lenders Look at Self Employed Income?

I own my own business and of course find every deduction there is possible to have as an expense. Do the mortgage companies go by gross income or adjusted after all deductions are made?

1 Answer

The mortgage industry is very cognizant of the fact that business owners take deductions from their gross income for tax purposes. As a result, the standard underwriting analysis of a business owner's tax returns allows the underwriter to add certain things back to the adjusted gross income to determine the income that will be considered for qualifying purposes.

For loans eligible for purchase by Fannie Mae, i.e. conventional/conforming loans, underwriters use FNMA form 1084 to analyze tax returns for self-employed borrowers who apply for full documentation loans.

The other way that the mortgage industry manifests its awareness of the needs of business owners and self-employed borrowers is by offering what are commonly referred to as "stated income" loans. In fact, these loans were originally conceived to meet the needs of self-employed borrowers, taking into account that what you see on someone's tax return is often much different than what they really make. For that type of a loan, you only have to show that you have been self-employed for two years. Usually, a letter from a CPA or a copy of a business license will do the trick.

For these types of loans nowadays you have to have better credit than the minimum required for full-doc loans and the down-payment requirements are higher (most lenders require 10%), but it is an alternative.