Income qualifying for mortgage financing: self-employed borrowers

Income qualifying for mortgage financing: self-employed borrowers

Income qualifying for mortgage financing: self-employed borrowers

In the previous two columns, Mark Wells at Preferred Financial Services addressed qualifying income issues for borrowers who are salaried or hourly workers. Today, he looks at the rules for self-employed borrowers, which are quite different.

I am self-employed and I made $100,000 last year. Is that my qualifying income?  This is one of the most common misconceptions I run across. Many self-employed borrowers say “I made $100,000,” meaning that their company had $100,000 in gross receipts. But as a business owner, your qualifying income is your net income—that is, the income or profit you report after you have deducted your business expenses from your gross receipts. Generally, your net income must be averaged for the past two years to determine your qualifying income.

I am self employed, but I formed a corporation and pay myself a salary, and issue myself a W-2 each year. So is my qualifying income my W-2 income or is it my profit?  In your case, it is both.  Your W-2 wages are credited to you just like an employee—the gross amount is credited. Then your corporate net profit can be added to your W-2 wages to determine your qualifying income. However, beware that if your corporation had a loss for the year, then your portion of that loss is subtracted from your W-2 wages.

I own 20 percent of the corporation I work for. Am I self-employed?  Technically, you are not. You must own 25 percent or more of a corporation before you are considered self-employed.

Does that mean I cannot add my share of the corporate profit to my W-2 wages?  No, even though you are not technically self-employed, you still get to add your portion of the last two years’ averaged profit to your income.

I write off many expenses through my company. Can that help me qualify?   Since you use net income for qualifying, any expenses  you write off mean less profit you report, which is great for taxes—but not for qualifying for a mortgage. However, there is a little-known rule in underwriting that if a “third party” is making a particular payment (for instance, a car payment), then that debt does not have to be counted in the borrower’s debt to income ratios. So regardless of whether you take a mileage deduction, or you itemize your car expense, make the car payment from the corporation checkbook. Then even though the car expense lowers your net income, you have eliminated the car payment from your debt ratios. You can also do this with credit cards used for business purposes. Underwriting requires 12 months’ cancelled checks to verify that a third party is making the payments on a particular debt.

Are there any items in my business tax return that can be added back to my income?  Yes, any depreciation write-offs can be added back, and any Section 179 write-offs. Also, any depletion allowances can be added back. All of these are added back in the same proportion as your ownership percentage.

I welcome any comments or questions and can be reached at (864) 235-9596 or via email at

Or Text Me Now! 864-430-4856.