Self-Employment Income & Home Loans

If you own 25% or more of a business then the mortgage industry considers you “self employed” and you may be required to provide additional documentation for that business to determine your Qualifying Income. If you are a Sole Proprietor then you will report your income on the Schedule C of your tax returns; if your business operates under a Partnership, LLC, S Corporation, or C Corporation then you will file business tax returns, produce a K-1 Form, and report the company on your Schedule E of your personal tax return. Check out the master Mortgage Document Checklist for a full list of what’s required for a home loan.

Self-Employed Analysis

Business tax returns are either done on the IRS Form 1065 (for Partnerships and LLC), IRS Form 1120S (for S Corporations and LLC-S), or Form 1120 (for C Corporations). Typically, but not always, a two-year average is required when calculating Qualifying Income for self-employed individuals.

Calculate Self-Employed Income

The formulas below are guidelines and are intended to provide an understanding of how the mortgage industry calculates qualifying income so you can roughly calculate your debt to income. Calculating the true qualifying income isn’t this cut and dry and you should call us with questions. Don’t approve (or deny) yourself based on your own calculations – there are a myriad of other factors that are considered beyond the formulas below when calculating income. Let us do the work before you move forward.

K-1 Income

A K-1 form is like the business person’s W2. A K1 shows money paid to someone from the business AND show the percentage of ownership that the person owns. When figuring the total qualifying income you’ll need to enter any losses as negative numbers.

+ Ordinary Income (Box 1)

+ Net Rental Real Estate / Other Net Income (Box 2)

+ Guaranteed Payments to Partner (Form 1065)

= Total Qualifying Income

Partnership & LLC – Form 1065 or 1120S

1065 and 1120S are business tax returns are for Partnerships and LLCs. We will require all pages of these tax returns if someone on the loan owns 25% or more of this business. When figuring the total qualifying income you’ll need to enter any losses as negative numbers.

Ordinary Income (or Loss) from Other Partnerships (1065 Line 4)

+/- Nonrecurring Other Income (or Loss) (1065 Line 7, 1120S Line 5)

+ Depreciation (1065 Line 16c, 1120s Line 14)

+ Depletion (1065 Line 17, 1120s Line 15)

– Mortgages, Notes, Bond payable in less than 1 year (1065 Schedule L Line 16, 1120s Schedule L Line 17)

– Non-deductible Travel & Entertainment (1065 Schedule M-1 Line 4b, 1120s Schedule M-1 Line 3b)

= Sub Total

x Percentage of Ownership (Line D of K-1)

= Total Qualifying Income

C Corporation – Form 1120

1120 business tax returns are for C Corporations. We will require all pages of these tax returns if someone on the loan owns 25% or more of this business. When figuring the total qualifying income you’ll need to enter any losses as negative numbers.