Income qualification question for a mortgage

[Chris in OK]

Hi everybody. Long time member/staff member checking in with a question. I’ve been super busy and have lost track of the community at large. Anyway, long story short I am self employed, and have been for going on three years. It’s about time for us to upgrade our housing situation, as I have two teenagers, a preteen, and a younger child. We have outgrown our home. 
 

Anyway, my main question is in regards to how income is looked at as a self-employed borrower. Current home balance is $52k, worth probably $95k in this market. That would be sold. Do lenders look at gross income before any deductions? Something else? We are very early in the process, I just want to equip myself with the knowledge necessary before going much further. 
 

Thanks in advance Creditboards family! 
 

 

[hegemony]

 

IME what matters is gross household income before deductions.

Edited January 24, 2022 by hegemony

[Chris in OK]

Good to know. I have just filed my second tax return as a self employed borrower.  Gross income averages out to ~$177k/yr. If that is indeed that calculation they use I should be good to go.  Thanks Heg.

[8ball]

https://themortgagereports.com/18303/mortgage-self-employed-1099-business-get-approved

Mortgage lenders only count taxable income

If you hope to buy a house or refinance while self-employed, this point is key: Lenders only count taxable income toward your mortgage.

Underwriters use a somewhat complicated formula to come up with “qualifying” income for self-employed borrowers. They start with your taxable income, and add back certain deductions like depreciation, since that is not an actual expense that comes out of your bank account.

Business owners and other self-employed workers often take as many deductions as they can. While this can save you a lot of money with income tax, it can also hurt you when it comes to your mortgage application.

For instance, say you earn $6,000 a month. But after deductions, your taxable income is only $4,000 per month. Here’s how your home buying budget changes:

Monthly Income	$6,000 (total)	$4,000 (taxable)
30-Year Fixed Interest Rate	3.5%	3.5%
Current Monthly Debts	$300	$300
Down Payment	$40,000	$40,000
Maximum Home Price*	$407,800	$250,000

*Example assumes a maximum debt-to-income ratio of 36%

In this example, losing $2,000 off your monthly income reduces your home buying budget by more than $150,000.

[VAloanMaster]

On 1/23/2022 at 7:37 PM, Chris in OK said:

Hi everybody. Long time member/staff member checking in with a question. I’ve been super busy and have lost track of the community at large. Anyway, long story short I am self employed, and have been for going on three years. It’s about time for us to upgrade our housing situation, as I have two teenagers, a preteen, and a younger child. We have outgrown our home. 
 

Anyway, my main question is in regards to how income is looked at as a self-employed borrower. Current home balance is $52k, worth probably $95k in this market. That would be sold. Do lenders look at gross income before any deductions? Something else? We are very early in the process, I just want to equip myself with the knowledge necessary before going much further. 
 

Thanks in advance Creditboards family! 
 

 

Lenders will use your adjusted gross income. There are some deductions that we can add back to the AGI like depreciation.

A couple of other things to be aware of.

Declining income can be a problem and you'll need to provide 3 months bank statements that basically supports what you show on your P&L.