How to Calculate a Self-Employed Borrower's Income
Original post by Alia Nikol of Demand Media
The income of a self-employed borrower is not as easily verified as the income of a borrower who holds a regular W-2 wage job. Many lenders and credit analysts request tax returns of applicants who are self-employed and calculate income based on the net amount of self-employment income reported to the IRS. Self-employment income is reported to the IRS on Schedule C as an attachment to the individual's federal tax return on Form 1040.
Request copies of the borrower's last tax return. It is common to request the last two years of a self-employed borrower's returns to demonstrate income consistency and develop an average income figure.
Look at line 12 on the first page of the borrower's tax return on Form 1040. Line 12 lists the applicant's net self-employment income from all sources, and represents annual self-employment income. If you average net income from two returns, add line 12 from both returns and divide by two.
Divide the figure from line 12, or the average line 12 figure when using data from two returns, by 12. The result is the borrower's monthly income from self-employment.
- IRS.gov: Self-employed Individuals Tax Center
- FHA.com: FHA Loan Myths - The Self-employed and FHA Loan Qualification
About the Author
With a background in taxation, Alia Nikol specializes in business and personal finance topics. She is an IRS enrolled agent pursuing a Bachelor of Science in accounting and journalism at Metropolitan State College of Denver.