When you submit an application for a mortgage, your lender will examine your income to determine whether you can afford the loan. It’s almost simple for those who are employed because you can use recent tax returns, pay stubs, and W-2s. But what happens if you’re self-employed?.
You may be wondering how to determine your income for a mortgage if you’re a small business owner, gig worker, freelancer, or independent contractor. Learn how to estimate your self-employment income in this article to decide whether you should buy a house outright or refinance one.
Who is Considered Self-Employed Individuals?
Anyone who works for themselves rather than a business is considered self-employed, and they typically report self-employment income. However, you must demonstrate that you have worked for yourself for at least two years.
25% or More Ownership in a Business
You are regarded as self-employed if you own at least 25% of a company. However, in order for the company to determine your qualifying income, mortgage lenders will need you to provide additional documentation.
You must disclose your business income on Schedule C of your tax returns if you are a sole proprietor. Additionally, if your business is organized as a corporation, partnership, or S corporation, you must file business tax returns and include information about it on Schedule E of your personal tax returns.
A freelancer is a self-employed individual who makes money by offering services to numerous clients, usually on a temporary basis. Even though they can accept contracts from businesses and organizations, freelancers are still regarded as self-employed.
A contract worker is someone who enters into a legal agreement with a company or business to perform specific services for a set period of time in exchange for payment, also known as an independent contractor or 1099 earner. Though they sign a contract, they remain self-employed individuals.
Seasonal workers, as the name implies, offer their services to satisfy a company’s transient needs at specific times of the year. This includes companies that are open during peak seasons but closed during off-peak periods.
Gig and Side Job Workers
Independent contractors and freelancers who work on transient projects for a variety of clients are known as gig workers. Typically, they enter into formal contracts with high-demand businesses to provide services in exchange for payment.
Self-employed Gross vs. Net Income
Gross income for self-employed people is their total income before taxes and other deductions. This can be your employer’s salary, rental income, dividends, and compensation for services rendered prior to deducting retirement contributions and health insurance premiums.
On the other hand, your net income, also known as take-home pay, is the amount of money you actually keep after taxes and other deductions. While self-employed people receive gross pay and are responsible for paying their own taxes, most W-2 employees receive their net income in a paycheck with taxes already deducted.
What Type of Income Will Mortgage Lenders Consider?
Lenders will require evidence of a steady income when you apply for a mortgage to make sure you can afford your monthly payments without defaulting. Lenders typically consider a variety of income sources, depending on your circumstances, including:
How to Calculate Self-Employed Income
The majority of mortgage lenders prefer to see evidence of your consistent income as well as at least two years of self-employment income.
Follow these easy steps to determine your self-employment income for a mortgage application:
The income needed to qualify for a mortgage, for instance, would be $95,000 + $98,000 = 193,000 divided by 24 if your net income for years one and two was $95,000 and $98,000, respectively. The result is $8,041per month.
It’s important to remember that lenders might be reluctant to loan you money if your income declines year after year because it might be a sign of a failing business.
What Else Can Self-Employed Individuals Show as Proof of Income?
You can additionally demonstrate your income as a self-employed borrower by giving:
Are There Mortgage Loans Specifically for Self-Employed Individuals?
Yes, there are numerous mortgage options available to borrowers who are self-employed. The most popular loan options include:
Through Angel Oak Home Loans, you may obtain the aforementioned self-employed mortgage. Simply fill out an online form to request information about the loan product you’re interested in.
What income do mortgage lenders look at for self-employed?
Self-employed individuals typically submit income tax forms to document their income for a mortgage loan, but how is self-employment income calculated? The lender will then calculate the average monthly income by averaging the past two years’ income and dividing that annual income by 12.
Do lenders look at adjusted gross income for self-employed?
You must prove your income as a self-employed person by providing your two most recent income tax returns and business profit-and-loss statements. To determine whether you can afford the loan, most lenders combine the profit-and-loss statement with an average of your AGI.
What do mortgage underwriters look for self-employed?
If you want to buy a house but are self-employed, you fill out the same mortgage application as everyone else. When you’re a self-employed borrower, mortgage lenders also take into account the same factors: your credit score, the amount of debt you have, your assets, and your income.
What is considered gross income for self-employed?
1 Gross income consists of the same items that make up earned income, such as wages or salaries, commissions, bonuses, and business income after deducting costs if the individual is self-employed.