Question 1

How do lenders calculate income for self-employed borrowers?

Accepted Answer

Conventional lenders average your last 2 years of Schedule C net income from your 1040 tax returns — after all business deductions. They do not use bank statements or gross revenue. This often results in a qualifying income far below your actual earnings.

Question 2

What is a Non-QM loan and is it right for self-employed borrowers?

Accepted Answer

A Non-QM (Non-Qualified Mortgage) bank statement loan qualifies you based on 12-24 months of average monthly bank deposits rather than your tax returns. This is ideal for self-employed borrowers who write off large business expenses. The tradeoff is a slightly higher interest rate (typically 0.5-2% above conventional rates).

Question 3

Why do my tax deductions hurt my mortgage application?

Accepted Answer

Lenders use your Schedule C net income — the number after all your business write-offs. The same deductions that reduce your tax bill also reduce the income figure lenders use to calculate how much you can borrow. A freelancer making $200K gross with $120K in deductions appears to earn only $80K to a conventional lender.