By Brandon Sooknanan, Founder of StatementReady
When a borrower is self-employed, the broker's first job on the loan file is turning tax-return or deposit figures into a monthly income number you can explain. The arithmetic isn't hard, but it's easy to lose track of which figures went in and why. This post walks through three ways to lay out that math and shows a free calculator that does the adding while leaving every judgment call to you and the lender.
Two tax years, one monthly average
The calculator works from two tax years: a latest year and an earlier year. Whatever method you pick, it totals each year and then averages them:
Monthly average = (year 1 + year 2) ÷ 24
Results are rounded to the cent. You see each year's total and the two-year monthly figure side by side, so if one year is much lower than the other you notice it on the screen instead of later in the file.
Method 1: Schedule C plus the add-backs you enter
For each year, enter Schedule C net profit and any add-backs. The page has fields for:
- Net profit (Schedule C), and a loss can be entered as a negative number
- Depreciation
- Depletion
- Business use of home
- One other add-back you enter
Each year = Schedule C net profit + the add-backs you enter.
A round-number example: latest year net profit $84,000 plus $6,000 depreciation = $90,000; earlier year net profit $78,000 plus $6,000 depreciation = $84,000. Monthly average = (90,000 + 84,000) ÷ 24 = $7,250.00.
The important part is what the calculator does not do. It adds only the figures you type and doesn't decide which items count. Which add-backs a lender accepts is the lender's call, so confirm with the lender before you carry the number forward.
Method 2: 1099 gross less expenses
For a borrower paid on 1099s, switch the mode to 1099. For each year, enter 1099 gross and the business expenses you enter:
Each year = 1099 gross − the business expenses you enter.
Example: $120,000 gross less $30,000 expenses = $90,000; $110,000 less $26,000 = $84,000. Same $7,250.00 monthly average.
Method 3: Gross receipts with an expense factor
Some programs work from gross receipts and an expense factor. In Expense factor mode:
Each year = gross receipts × (100% − the expense factor you enter).
The factor field is required and reads "from the lender." The calculator sets no factor of its own; use the one the lender gives you. If a lender says 40%, then $150,000 gross receipts becomes $90,000 for that year.
What it deliberately leaves out
- No pass/fail. It shows arithmetic, not an approval or a decision. The lender makes all underwriting decisions.
- No built-in rules. No default factor, no default list of allowed add-backs.
- Nothing sent. It runs in your browser, and what you type isn't sent or stored.
It also isn't the Fannie Mae calculator. StatementReady isn't affiliated with or endorsed by Fannie Mae, Freddie Mac or any lender.
When tax returns don't tell the story
Some self-employed borrowers write off enough that their returns understate what comes into the business. Some lenders offer bank statement loans for that case, where income comes from 12 or 24 months of deposits instead. The free bank statement income calculator gives a monthly view from deposit totals, and you can carry either monthly figure into the mortgage DTI calculator.
Try it
The self-employed income calculator is free and needs no account. Pick Schedule C, 1099 or Expense factor, fill two years, and the formula sits right under the result so anyone reviewing the file can follow it.
When you move to the real statements, StatementReady builds the bank statement income worksheet from uploaded PDFs and checks whether each statement's transactions add up to its printed balances. It assists your review of the loan file; the lender makes all underwriting decisions.
Not legal or tax advice. StatementReady isn't affiliated with or endorsed by Fannie Mae, Freddie Mac or any lender.
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