Tool 02
Self-employed qualifying income
Your tax return is built to minimise income. Your mortgage application needs the opposite. Form 1084 is the worksheet where those two goals meet.
Tool 02
Self-employed qualifying income worksheet
Start from Schedule C line 31, add back what was never cash, subtract what will not recur, then average two years unless the second year fell.
Qualifying monthly income$6,922
- Earlier year, adjusted
- —
- Recent year, adjusted
- —
- Add-backs are worth
- —
- Housing payment at 45% DTI
- —
Sample output using the standard Form 1084 add-backs. Your underwriter's figure governs.
Every line the worksheet touches
- Net profit or lossSch. C, line 31The starting point. This is the number your accountant worked hard to reduce.
- Other income claimed on this returnSch. C, line 6Removed if it is non-recurring, such as a one-off insurance settlement or a grant.
- DepreciationSch. C, line 13A non-cash deduction. Added straight back, including Section 179 equipment write-offs.
- Meals and entertainment, non-deductible portionSch. C, line 24bThe portion the IRS disallowed was still money you spent. Underwriting subtracts it.
- Business use of homeSch. C, line 30A deduction taken against a cost you were paying anyway. Added back in full.
- DepletionSch. C, line 12Non-cash, same treatment as depreciation. Rare outside extraction and timber.
- Amortization and casualty lossSch. C, variousNon-cash write-offs found on the Form 4562 attachment.
- Mileage depreciation componentBusiness milesA per-mile depreciation rate applied to business miles driven, taken from the IRS rate for that tax year.
Six rules that decide the file
Two-year averaging, unless income declined
Qualifying income is normally the 24-month average of the two most recent complete tax years. If year two is lower than year one, the underwriter uses the lower year instead of the average, and asks in writing why the business shrank.
Ownership under 25% is not self-employment
Own less than a quarter of the business and your W-2 wages are treated as ordinary wage income. That single threshold changes the documentation burden completely.
K-1 distributions need business liquidity
S corporation and partnership distributions can be used as income, but the underwriter tests whether the business could keep paying them. A current ratio or quick ratio below 1.0 usually ends the conversation.
A year-to-date profit and loss is not optional
Most desks want a profit and loss covering the current year through the most recent quarter-end, plus matching business bank statements. CPA preparation helps; it is not always required.
Bank statement files trade paperwork for price
Twelve or twenty-four months of deposits, with the lender applying an expense factor of 15% to 50% to arrive at income. Expect a rate one to two points above full documentation.
Verbal verification happens right before closing
Within ten days of closing the lender confirms the business still exists and still trades, usually through the state registration, a CPA letter or a business licence.
Beyond Schedule C
Four business structures, four different calculations
| Structure | Starting figure | The extra test |
|---|---|---|
| Sole proprietor | Schedule C net profit, line 31 | None beyond the standard add-backs and the two-year trend. |
| Partnership | Schedule K-1, ordinary business income plus guaranteed payments | Business liquidity. Distributions must be supportable, not merely historical. |
| S corporation | W-2 wages plus K-1 ordinary business income | Ownership percentage and a current or quick ratio test on the business return. |
| C corporation | W-2 wages, with dividends analysed separately | Rarely helpful. Retained earnings usually cannot be used as personal income. |
Own less than 25% of the business and your W-2 wages are generally treated as ordinary wage income, which removes most of this analysis entirely.
Sometimes. Fannie Mae allows a one-year analysis where the business has existed for five years or more, the borrower has a documented history in the same line of work, and the automated finding permits it.
It reduces net profit, but the depreciation portion is added back on the worksheet. A large equipment purchase written off in one year is usually recoverable in the calculation.
S corporation distributions can be used, but the underwriter will test whether the business has the liquidity to continue them. A quick ratio below 1.0 tends to end that conversation.
Any deposit above 50% of your monthly qualifying income generally needs to be sourced. Transfers between your own accounts are fine; unexplained cash is not.
Send me two years of returns
I will run the worksheet and tell you your qualifying income before anyone pulls credit or takes an application. You should know your own number first.
Three wholesale quotes on the same day's pricing, before you choose.