Self Employed Home Loan

If I am the sole proprietor of a small business and apply for a home loan, what does the lender use as verification of my income? The Schedule C? If so, what figure?

2 Answers

Since there are hundreds of lenders and thousands of different loan programs, the answer to this question depends largely on what type of mortgage product you are interest in/qualify for and which lender will end up funding your loan.

A majority of self-employed individuals utilize "stated income" loans. Many self-employed people attempt to maximize their tax deductions and thus end up showing less income on their tax returns than if they were W2 wage earners.

Lenders make stated income loans available for people that earn a certain amount of money but cannot document it. Be advised that stating more income than you earn is mortgage fraud. However, if your stated income qualifies you for the product, the lender will not even examine your tax returns and charge a slight rate increase for the additional risk of stated income.

If, unlike most small business owners, you actually prepare your taxes in such a manner as to allow yourself enough income to qualify for your mortgage then your interest rate will almost always be better than using stated income. Furthermore, the possibility that you will be involved in a fraudulent mortgage is greatly reduced. In this case, you are on the right track: the schedule C is the starting point for how most lenders calculate your income. Beyond that, it varies from lender to lender.

Most lenders will start with line 31 of the schedule C and actually add back one or more fields. The most common calculation is net income (line 31) plus line 13 (depreciation).

Final note. If you provide tax returns, these will be your verification of income. If you do a stated income loan, your income will not be verified, simply the fact that you are self-employed and for how long.

As a sole proprietor, the lender is going to look at the income that you claim. There are few items from the schedule C that can be added back into the income such as depreciation.

If you write off a significant amount of money, you may need to look at alternative programs. The rates will be higher, but the income is what it is.

You may need to look at a no ratio loan. This will not factor in how much income you make for qualifying. The other way to qualify would be to use bank statements. There are a few banks that will allow you to use a percentage of the deposits from your bank statements as income.