Schedule C: Sole Proprietors and Single-Member LLCs

For sole proprietors and single-member LLCs filing Schedule C, lenders use: Starting point: Schedule C, Line 31 (Net Profit or Loss) Add back: depreciation (Schedule C, Line 13) and depletion, business use of home (Line 30), one-time losses Subtract: one-time income items that aren't recurring Formula: (Year 1 adjusted net income + Year 2 adjusted net income) ÷ 24 = monthly qualifying income Example: Year 1 Schedule C Line 31: $95,000; add depreciation $8,000 = $103,000 adjusted Year 2 Schedule C Line 31: $112,000; add depreciation $8,500 = $120,500 adjusted 2-year average: ($103,000 + $120,500) ÷ 24 = $9,312.50/month qualifying income YTD profit and loss statement: lenders also require a year-to-date P&L (typically prepared by a CPA) to confirm current-year income is tracking consistent with prior years. If the YTD P&L shows a significant decline from the prior-year rate, the lender may use the lower figure.

S-Corps, C-Corps, and Partnerships

S-Corporation: self-employed owners who operate through an S-Corp receive a W-2 wage and may receive K-1 distributions. Lenders calculate income as: • W-2 wages paid to the owner • Plus pro-rata share of business net income (from S-Corp return, Form 1120S) • Plus depreciation add-backs at the business level The business must show profit — if the S-Corp shows a loss on its return, the loss is subtracted from qualifying income. Partnership/LLC with multiple members: lenders use the owner's K-1 distributive share of income, adjusted for depreciation. The partnership must be profitable for the income to count. C-Corporation: less common for owner-operators. Owners are W-2 employees; dividends and distributions from a C-Corp are typically not counted as qualifying income for mortgage purposes. C-Corp owner-operators typically qualify on their W-2 salary alone.

The Declining Income Problem

One of the most significant risk flags for self-employed borrowers: declining income from Year 1 to Year 2. Fannie Mae and Freddie Mac guidelines require lenders to analyze the trend of self-employed income. If income declined from Year 1 to Year 2, the lender typically uses the lower Year 2 figure (not the 2-year average) and may require additional analysis of whether the trend is likely to continue. Example: Year 1 adjusted net income: $150,000 Year 2 adjusted net income: $110,000 (27% decline) If the 2-year average were used: $260,000 ÷ 24 = $10,833/month If Year 2 only is used: $110,000 ÷ 12 = $9,167/month A 27% income decline from Year 1 to Year 2 will require explanation and may trigger use of the lower figure, potentially affecting the qualifying loan amount by tens of thousands of dollars.

“The first thing I do with a self-employed buyer is ask them to share their last two tax returns, specifically the Schedule C or business return. From those, I can calculate their approximate qualifying income before they talk to a lender. This gives us a realistic price range to work with and — if the conventional qualifying income is significantly below actual cash flow — directs us to the right alternative program. This conversation should happen 6 months before the buyer wants to purchase, not the week they want to make an offer.”

— Ryan Brown, Principal Broker & CEO, Own Luxury Homes®

• Self-Employed Homebuying (Hub)
• Bank Statement Loans
• Requirements for Self-Employed
• 1099 and Contractor Mortgages
• Tax Returns and the Write-Off Trap
• Tips to Get Approved
• Gig Worker Mortgages

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