When applying for a home loan as a self-employed borrower, calculating your income can be a little more complicated than it is for those who are employed by a company. Unlike traditional employees, self-employed borrowers have a variable income that can change from year to year.
- Start with Your Net Income
The first step in calculating your income as a self-employed borrower is to determine your net income. Net income is the amount you earn after deducting business expenses from your gross income. To calculate your net income, start with your gross income and subtract any allowable expenses, such as office rent, equipment, or supplies. This will give you your net income for the year.
- Determine Your Average Monthly Income
Once you have your net income, you’ll need to determine your average monthly income. To do this, divide your net income by the number of months in the year. For example, if your net income is $80,000 for the year, your average monthly income would be $6,666.67.
- Calculate Your Debt-to-Income Ratio
Your debt-to-income ratio is a critical factor in determining your eligibility for a home loan. To calculate your debt-to-income ratio, divide your monthly debt payments by your average monthly income. Your monthly debt payments include any current loan payments, such as car loans, student loans, or credit card payments. Your debt-to-income ratio should be no higher than 43% for most lenders.
- Consider Non-Taxable Income
Self-employed borrowers may have non-taxable income that can also be used to qualify for a home loan. This can include income from rental properties, investments, or retirement accounts. To include non-taxable income in your calculations, add the total amount of non-taxable income to your net income before dividing by the number of months in the year.
- Provide Documentation
When applying for a home loan as a self-employed borrower, you’ll need to provide documentation of your income. This can include tax returns for the past two years, profit and loss statements, bank statements, and other relevant financial documents. Be sure to keep accurate records of your income and expenses throughout the year to make the documentation process easier.