Calculating Income for Self Employed Borrowers

Posted on February 13th, 2011 by Bonnie Wilt-Hild
Bonnie Wilt-Hild
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University ( as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at:

As everyone is aware I teach some government lending training courses for FHA Online University and one of the questions that I get pretty frequently is about calculating income for a self employed borrowers. Typically the answer I give is pretty short simply because we are usually discussing something else at the time the questions is asked and I don’t want to loose focus on the topic of discussion which is generally how to adequately document employment. Well I thought today I would discuss in greater depth how to calculate income for a self employed for the benefit of all of those students whose questions required a little more discussion.

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First, I want to tell you that I always use the adjusted Gross Income Method (AGI) and follow the FNMA worksheet which is provided on their website. This worksheet is awesome because it will walk you through the calculations so that you know exactly what you can add back in and what you need to subtract out. Remember for FHA and VA purposes you will always need to collect the most recent two years tax returns with all schedules.

If your borrower files corporate tax returns (1120’s) or partnership returns, you will need these also. If you are underwriting a Conventional product and the AUS only calls for the most recent year, then this will be sufficient for underwriting purposes. Remember, if your borrower has filed an extension for the most recent tax year, be sure to collect a copy of this as well.

Always begin with the borrowers individual tax returns (1040’s) and start with the borrowers adjusted gross income. You may then begin subtracting income or adding back income as appropriate. For instance, you may subject wages and salary considered elsewhere but add back in any tax exempt income. You will also address business income or loss as identified on the schedule C at this time if the borrower files one. Schedule E depreciation will also be added back in at this time as would things like non taxable social security benefits.

Once you complete this step, you will then begin with the adjustment schedule as per your worksheet. This section allows for the add back of IRA deductions, one half self employment tax, self employment health insurance as well as Keogh Retirement plans and alimony paid if you are counting this as a debt against the borrower.

Next you will address any corporate tax returns or partnership returns if you have any, and will determine the income available to the borrower. You will begin with taxable income and then subtract the total tax due, add back in depreciation and depletion then subtract any mortgages, notes or bonds payable in less then year. This information would also be found on the borrowers 1120’s. Remember to allow the borrower only the percentage of these add back with relation to the percentage of the business owned by the borrower.

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Additionally, if you have an audited P&L from the borrower you may include this income in terms of total net profit. Remember, use the FNMA self employed income analysis the first few times you calculate the income. It will help you to become more familiar with the items you can add back in and things that you need to subtract from the borrowers income. As always, happy underwriting.

(Above is the link to the worksheet)

SOURCE: Published by NAMP® Publishing Group, a division of the National Association of Mortgage Processors (NAMP) (


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