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If you’re self-employed and filing taxes as a sole proprietor, your income on Schedule C plays a big role in what you qualify for when applying for a mortgage—whether you’re purchasing or refinancing a home.

Let’s break down what Schedule C income is, how it’s calculated, and what underwriters are really looking for.

What Is Schedule C Income?

Schedule C income refers to the business income you report as a sole proprietor. If you’re running your own business under a DBA (Doing Business As)—maybe you’re moonlighting, freelancing, or running a side hustle—then your profits and losses are reported on a Schedule C, which is part of your personal tax return.

This is different from filing through an LLC, S Corp, or other formal business entity, which follows a different income documentation path. If you’re in Texas and earning money this way, lenders will classify that as Schedule C income and follow a unique process to determine what income can be counted toward your mortgage.

The tax write-offs for being self-employed help save a ton of money when filing income taxes; however, those write-offs may not be so great when qualifying for a home loan. Simply said: when getting a mortgage the qualifying income is determined by the money you pay taxes on. If you don’t pay taxes on it then chances are we can’t use it.

By having those tax write-offs you’re telling Uncle Sam that you need to spend that money and incur those expenses in order for your business to make the money it does and therefore can’t be considered for Qualifying Income and increases the Debt To Income.

Check out our Debt To Income Calculator to see the impact of qualifying income.

Sole Proprietor Income

Below is an example of how income is calculated for Sole Proprietors filing on the Schedule C of a tax return. Please note that this is an over-simplification of the process and shouldn’t be used as tax advice or as a way of suggesting how to qualify for a home loan. The actual determination on what can be considered qualifying income is slightly more complicated and won’t be covered here; however, the information below provides a solid foundation on what the mortgage industry does for Sole Proprietor income.

Average vs. Most Recent Year

The basic rule of thumb for using self-employment income is to use the past two year’s of tax returns and then take the average of both year’s; however, this isn’t always the case. The real “trick” to determining the income is knowing what year’s income to use. If the income was consistent for the past two year’s, or has been increasing, just use the average of the past two years. If the income is declining (i.e. the income of the most recent year is lower of that from the previous year) then use the lower, most recent year’s income.

Calculating Schedule C Income

The formula is relatively simple – you start with the net profit (or less) and then add-back a few items and subtract meals and entertainment. If the net income is a loss then that number will be a negative and it’s absolutely possible that you can end up with a negative qualifying income depending on the total expenses on line 28.

Net Profit (or Loss) (Line 31)

+ Plus Depletion (Line 12)

+ Plus Depreciation (Line 13)

– Minus Meals & Entertainment (Line 24B)

+ Plus Business Use of Home (Line 30)

= Qualifying Income

Once you have this final figure you can then Calculate Your Debt To Income (DTI). As always, please call us if you have any questions as we’re here to help and we’ll be happy to run the calculations to determine your qualifying income.

Profit and Loss Statement

A Profit and Loss Statement (P&L – pronounced “P and L”) may be required if you’re self-employed and have not yet filed your tax returns for the previous year. This doesn’t happen often but could be required substantiate a trend in a business’s growth pattern and help us determine your Qualifying Income.

The Role of P&L Statements

If your most recent tax return hasn’t been filed yet or your income dipped last year, a current-year P&L statement can help. While lenders don’t use it to calculate your qualifying income directly, it can validate whether your business is back on track.

This is especially important in Texas markets like Dallas where self-employment is growing, and many borrowers use P&Ls to show their business is rebounding after investing in equipment, supplies, or other big expenses.

Common Mistakes to Avoid

When it comes to Schedule C income, a few things can trip people up:

Assuming write-offs don’t matter for lending
Forgetting that net losses can hurt your application
Not explaining big year-over-year changes
Leaving out add-backs that could boost qualifying income

Our team helps self-employed borrowers across Dallas, Texas, and throughout the United States, including the US Virgin Islands and Puerto Rico, understand what lenders are looking for and how to make your income work for you.

Need Help With Your Schedule C Income?

Whether you’re full-time self-employed or picking up extra income on the side, we can help you understand how your business finances impact your mortgage options.
We’ll walk through your tax returns, help estimate your qualifying income, and give you a clear plan moving forward—no guesswork involved.

Reach out to us today and let’s figure out how to make your Schedule C income work for your mortgage goals.

When you think mortgage, think Mark.