Posted on: 30th Sep, 2008 02:56 pm
Which one is considered by lender as your income?
I am self-employed, write off my expenses and have received conflicting statements from lenders. Is it either or does it vary by lender?
Thought I would separate this from my previous questions.
I am self-employed, write off my expenses and have received conflicting statements from lenders. Is it either or does it vary by lender?
Thought I would separate this from my previous questions.
Hi jdlegall
Welcome to the Forums!
As you are self employed, the lender will generally consider the amount of money on which you paid taxes as your gross income. For example, say your business is worth $200,000 but you paid taxes on $125,000. The lender will consider $125,000 as your gross annual income. To verify your income, you will have to show tax returns of the last two years.
Feel free to ask if you have further queries.
Sussane
Welcome to the Forums!
As you are self employed, the lender will generally consider the amount of money on which you paid taxes as your gross income. For example, say your business is worth $200,000 but you paid taxes on $125,000. The lender will consider $125,000 as your gross annual income. To verify your income, you will have to show tax returns of the last two years.
Feel free to ask if you have further queries.
Sussane
In case of self employed people, the taxable portion of the income is considered to be the gross income. Generally lenders consider this income.
the answer depends on how you file your taxes. if you file schedule c, that's pretty easy. your bottom line (gross less expenses) is your income. if you have depreciation, that can generally be added back in to increase the income. also, if you have a deduction for business use of home, that can generally be added in.
if you receive schedule e income, you'll likely be asked to provide corporate tax returns as well.
if you receive schedule e income, you'll likely be asked to provide corporate tax returns as well.
if you have a car payment that you write off that is also on your credit report, if the write off equals 12 months of that car payment, you can add that back as well, or cancel that payment from your DTI b/c the lender should not double wammy you.
Add back depreciation.
two year average of 2007 & 2006.
Remember though, if 2007's income is significantly less, most lenders will consider that declining income and will only use that year and require an explanation as to the decline.
good luck
Add back depreciation.
two year average of 2007 & 2006.
Remember though, if 2007's income is significantly less, most lenders will consider that declining income and will only use that year and require an explanation as to the decline.
good luck
well said elnora - i have to admit i neglected to account for a decline in income from one year to the next. that's a good catch.
They go by the adjusted gross income which is at the bottom of page one of your tax returns. This is the amount that the company brought in minus the business expenses to arrive at this. Lenders do not deduct for any personal expenses. Last but not least, if you have good credit, many lenders will accept just 1 year (the prior year) tax returns.
This subject is very confusing to buyers because when someone says gross income we think Gross Income on the Schedule C or the Total Income on the first page of the 1040 form.
If it is only the Adjusted Gross Income that lenders will look at, why do mortgage brokers always tell you the lender will only look at the Gross Income on the Schedule C, if you are self-employed? Isn't that misleading information?
If it is only the Adjusted Gross Income that lenders will look at, why do mortgage brokers always tell you the lender will only look at the Gross Income on the Schedule C, if you are self-employed? Isn't that misleading information?
i can only answer for me and those with whom i have worked (never been a broker).
i have never given a borrower the impression that i would use gross income from a schedule c; nor has anyone that i ever have worked with. it's standard underwriting practice to use the bottom line income and add back such things as depreciation and business use of home to come up with an overall total.
if there are loan officers - lenders, broker, whoever - telling borrowers that the gross income is the correct figure; that is definitely misleading.
caveat emptor, i guess.
i have never given a borrower the impression that i would use gross income from a schedule c; nor has anyone that i ever have worked with. it's standard underwriting practice to use the bottom line income and add back such things as depreciation and business use of home to come up with an overall total.
if there are loan officers - lenders, broker, whoever - telling borrowers that the gross income is the correct figure; that is definitely misleading.
caveat emptor, i guess.
gmakerley, you said this:
"if you file schedule c, that's pretty easy. your bottom line (gross less expenses) is your income. if you have depreciation, that can generally be added back in to increase the income. also, if you have a deduction for business use of home, that can generally be added in. "
The Federal Adjusted Gross Income can be very different than the Net Income on the Schedule C. If you write-off health insurance, stock losses, etc. then those are subtracted from your adjusted gross income on the 1040, but NOT on the Schedule C. Also, half of the cost of Self-employment tax is subtracted from the Adjusted Gross Income, but not the Schedule C. In my case, there was about a $12,000 difference between the C and the AGI. So....will a mortgage lender add back in my cost of health insurance, self-employment tax, and stock losses (and just look at my SC), or will they strictly follow the Federal Adjusted Gross Income number.
"if you file schedule c, that's pretty easy. your bottom line (gross less expenses) is your income. if you have depreciation, that can generally be added back in to increase the income. also, if you have a deduction for business use of home, that can generally be added in. "
The Federal Adjusted Gross Income can be very different than the Net Income on the Schedule C. If you write-off health insurance, stock losses, etc. then those are subtracted from your adjusted gross income on the 1040, but NOT on the Schedule C. Also, half of the cost of Self-employment tax is subtracted from the Adjusted Gross Income, but not the Schedule C. In my case, there was about a $12,000 difference between the C and the AGI. So....will a mortgage lender add back in my cost of health insurance, self-employment tax, and stock losses (and just look at my SC), or will they strictly follow the Federal Adjusted Gross Income number.
The lender will follow will strictly follow the Federal Adjusted Gross Income number. I don't think the lener will add back the health insurance, self-employment tax, and stock losses.
quite true...nobody is going to add back such things as you mentioned, greg.
I am confused because I am trying to buy a home and this is only my second year filing as self-employed. Do they look at the adjusted gross income prior to paying federal income taxes or after?
For you it would be gross income.
do lenders look at agi or taxable income line.
for a self employed borrower, lenders will look at adjusted gross income, yes; but that may include other things like interest, dividends, capital gains, etc. that wouldn't be included. if you file a schedule c as a self employed borrower, the income considered is the bottom line plus any depreciation that you wrote off.
depreciation is always considered as an allowable "add back" to income.
i'm finding that too many self employed people don't even know what their income is. that's pretty alarming - how do you know your accountant is even close if you don't even know what entails income?
depreciation is always considered as an allowable "add back" to income.
i'm finding that too many self employed people don't even know what their income is. that's pretty alarming - how do you know your accountant is even close if you don't even know what entails income?