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How to Calculate Income for Self-Employed Borrowers

There are four steps on how to calculate income for self-employed borrowers. Borrowers who are self-employed have two distinct roles in the process of generating their personal income.  Due to the dual nature of their daily roles of income generation and the higher risk, it can prove to be more challenging to determine their income than it would be for employed borrowers.

The first role is of the employer, meaning they need to create a service or product, market that item, and service that item to the marketplace. The second role is of the employee, meaning they need to execute the plans of the employer for that product or service. This is why when you compare the risk level to an employed borrower, the responsibility is more narrowed on executing your role at the company, not developing products, marketing, pricing, and process like a business owner has to do.

Here are the four steps mortgage underwriters follow on how to calculate income for self-employed borrowers. This is also commonly referred to as cash flow analysis:

Document The Income

First, the underwriter must determine the type of business structure and the documentation needed for the self-employed borrower. Depending on the source of income, it may require just the personal returns (IRS Form 1040) in the case of Schedule C (Sole Proprietor or Single Member LLC’s), Schedule F (Farm Income), or Rental Real Estate, which are all included on the personal return, or r it may require the addition of business returns in the case of a Partnership (IRS Form 1065 and the 1065 K-1 ), S Corporations (IRS Form 1120S and the 1120S K-1), or Corporations (IRS Form 1120 and associated W-2’s) along with the personal returns.

Business Stability

Second, the underwriter must determine the stability of the business income over the last two years.  The review must include the overall sales, overall expenses, and taxable income.  The most common form used to complete this process is the Fannie Mae 1088 form, which lays out these three key elements.

Determine Personal Income

Third, the underwriter can now determine the personal income generated from the business.  This is achieved through reviewing documents such as the schedules listed above (Schedule C, Schedule F, 1065 K-1’s, etc) and profit and loss statements and evaluating stability by following agency rules to determine the actual cash flow from each of the businesses.  This step is also called the “cash flow analysis,” which is when the underwriter converts the taxable income on the tax returns back to spendable income based on agency rules.

Financial Stability

Fourth, the underwriter must evaluate the financial stability by evaluating key sections of the business forms.  This rule applies only to the business entities that use the IRS 1065 Form (Partnerships), 1120S Form (S Corporations), and 1120 Form (Corporations). This step is key in determining the income was actually paid to the borrower so that the mortgage payment the self-employed borrower is applying for can actually be paid.


When calculating income for self-employed borrowers, there are more steps that just determining an income value. Documenting the income, determining stability of the personal and business income are all key steps in the income determination process. These each of these steps are required by investors and agenecies to substantiate the income is qualified.

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