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When it comes to calculating income, the process is very straightforward for most borrowers. For example, a borrower who is employed full time and paid a regular salary of $3,000 every 2 weeks - $3,000 x 26 paychecks per year = $78,000 annual / 12 months = $6,500 monthly income. A borrower who is full time but hourly, paid every 2 weeks is very similar - $23 per hour x 40 hours per week = $920 weekly x 52 weeks per year = $47,840 / 12 months = $3,986.67 monthly. The process is similar for part time borrowers, but we run into a challenge when it comes to self employed borrowers.

Since self employed borrowers, for the most part, don't receive regular paychecks with taxes deducted, we use their tax returns to verify income. This includes borrowers who are considered independent contractors who are paid on a form 1099. The same rules apply to borrowers who primarily earn commission income even though they likely receive a paycheck with taxes withheld.

When it comes to calculating self employment income we review the most recent 2 years of tax returns. Depending on how the business is set up we may need business tax returns in addition to the personal returns, but that is evaluated on a case by case basis. In this example we will look at a borrower who is a self employed tattoo artist. He is a sole proprietor who is files his income on Schedule C of his tax return and is paid directly by his clients. Here's how we calculate his income:

We take a look at 2 years of taxes and start with the bottom line, net profit. This is the profit reported after all expenses and deductions have been accounted for, and what taxable income is based on. Please keep in mind that even if your business is showing a gross profit of $1 mil a year, if your net profit is only $20,000 that is what we will use.

We add back the expenses listed here - for this borrower we add back depreciation, business use of home, and the mileage depreciation. That gives us the annual figure for income.

Assuming that this is the only income the borrower has reported on his taxes, we take those two annual figures and average them over 24 months. For this example we end up with a monthly income of $3,282.01. This amount may be far different from what the borrower actually takes home every month, but we have to follow the tax returns.

This is only one simple example of how we calculate self employment income and your situation could be entirely different! For more information on filing taxes with self employment income please reach out to your tax preparer. They can help with determining how best to file your taxes. For any other questions about self employment income or qualifying for a home loan please don't hesitate to reach out! I'm happy to help anytime!


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