How does underwriting evaluate self-employment income and determine what counts?

How do underwriters evaluate my self-employment income?

You want to know how underwriting looks at self-employment income and what documentation counts toward your loan qualification. Self-employed borrowers face different income verification requirements than W-2 employees because their income can vary year to year.

Underwriters typically review two years of tax returns, including your personal 1040 and business returns (1120, 1120S, or Schedule C). They calculate your qualifying income by taking your net business income and adding back certain deductions like depreciation, depletion, and one-time write-offs. The lender averages this adjusted income over the two-year period. If your income shows an upward trend, some lenders use just the most recent year.

Check that your tax returns show consistent or growing income over the review period. Gather your signed tax returns, business financial statements, and a year-to-date profit and loss statement prepared by your accountant. Some lenders also accept bank statements showing business deposits as additional documentation.

You can work with a CPA to optimize your tax strategy before applying, provide detailed explanations for any income fluctuations, or consider lenders that specialize in self-employed borrowers and offer alternative documentation programs. Share your complete financial picture with the lender and they can walk you through what income calculations work best for your situation.