Situation
Self-employed
Two-year averaging, Form 1084 add-backs, K-1 distributions and bank statement files, for people whose tax return deliberately understates what they earn.
The honest bitIf your accountant did a great job last year, your mortgage qualifying income is probably worse than you think. There are legitimate ways to add income back, and there are limits to them.
What this programme actually is
Self-employed qualifying income is not what you deposited and it is not what your business earned. It is a specific calculation that starts from the tax return, adds back non-cash deductions, subtracts income that will not recur, and then averages the result across two years.
Fannie Mae's Form 1084 is the worksheet almost every underwriter uses. From a Schedule C it takes net profit, adds depreciation and depletion, adds the business-use-of-home deduction, subtracts the non-deductible half of meals and entertainment, and subtracts any one-off income. From a partnership or S corporation it works through the K-1, the ordinary business income, guaranteed payments, and whether the business has the liquidity to keep distributing.
The rule that catches people is the declining income rule. If year two is lower than year one, the underwriter does not average. They use the lower figure, and they will ask for a written explanation of why the business shrank. A strong year-to-date profit and loss statement is often the only thing that keeps the file alive.
Self-employedWhat is included when I run it
- A full Form 1084 style worksheet run before you write an offer, not after
- Schedule C, Schedule E, K-1 and 1120S income mapped line by line
- Add-backs documented so the underwriter does not have to find them
- Declining-income exposure identified early, with a year-to-date profit and loss strategy
- Bank statement programmes priced against full documentation on the same day
- Business liquidity tested where distributions are being used as income
How the file moves
- 01Returns in fullTwo years personal and business, every page, every schedule. Missing pages stall more files than anything else.
- 02The worksheetWe run the calculation and show you the number before a lender sees it.
- 03Trend testRising, flat or declining. Declining means the lower year, and an explanation.
- 04Structure choiceFull documentation, bank statement, or profit-and-loss only. These price differently and we compare them.
- 05UnderwritingExpect questions about large deposits, related-party income and business continuity.
- 06Clear to closeA verbal verification of self-employment within ten days of closing, usually through the CPA or state registration.
Why people choose it
You see the number first
Most self-employed borrowers are told their income by an underwriter. Here you see the worksheet before we submit.
Add-backs are real money
Depreciation on a $400,000 rental portfolio can add several thousand a year to qualifying income.
Bank statement files exist
Twelve or twenty-four months of deposits with an expense factor, for borrowers whose returns simply will not work.
One credit pull, many desks
Self-employed guidelines vary wildly between lenders. Shopping them is the whole point of a broker.
What moves your price
| Factor | How it behaves |
|---|---|
| Business structure | Sole proprietor, partnership, S corporation and C corporation are four different calculations. |
| Ownership percentage | Under 25% ownership is usually treated as wage income, which is much simpler. |
| Expense factor | On bank statement loans the lender assumes a business expense ratio. 50% is common, 15% is achievable with a CPA letter. |
| Rate premium | Bank statement programmes typically price one to two points above full documentation (sample range). |
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.
Is this the right programme for you
Twenty-five minutes on the phone will settle it. If a different programme is cheaper for your file, I will say so.
Three wholesale quotes on the same day's pricing, before you choose.