Brad Pedersen

There are a few differences in how loans are processed and underwritten for self-employed borrowers.

1) An underwriter usually will want copies of two years of business and personal (if different) tax returns and a year-to-date profit and loss statement.

2) The income used to qualify for your loan is usually an average of the previous two years adjusted tax returns together with a year-to-date profit and loss statement.

Advanced Explanation

This guide for self-employed borrowers, adjusts the gross income as an underwriter might to evaluate credit worthiness on a mortgage loan.

From your individual tax return (1040)

1) Begin with your adjusted gross income

2) Add to this figure:

A) Tax-exempt interest income

B) Schedule C, Business Income or Loss - Depletion and Depreciation

C) Non-taxable IRA, Pension, Annuity, Social Security distributions

D) Schedule E and F - Depreciation

E) IRA Deductions

F) Self-Employed Health Insurance

G) Keogh Retirement Plan

H) Penalties For Early Withdrawal

I) Form 4562 Amortization and Form 8582 Carryovers

3) Subtract from this figure:

A) Wages, salary considered elsewhere

B) Taxable interest, dividend and refund income

C) Meals and Entertainment exclusion on Schedule C

D) Any Unemployment Compensation

E) Form 2106 Unreimbursed expenses (not fully deductible)

F) Form 8582 Unallowed Losses

Total individual return

If you can show evidence of access to funds of the corporation you may want to continue with the following.

From Form 1120

A) Begin with Taxable Income and Subtract Total Tax

B) Add Back Depreciation and Depletion

C) Subtract any mortgages, bonds or notes payable in less than one year

D) Multiply this by borrower's percentage of ownership

E) Subtract dividend income reflected on borrower's individual tax returns