A borrower who has at least a 25% ownership interest in a company is considered to be self-employed. It does not impact your ability to get a loan because you are self employed. The only thing that would affect your ability to get a loan is if you could not properly document your income. This is a problem for some self-employed borrowers. Similar to salaried borrowers, tax returns are used to demonstrate income. Self-employed borrowers may be able to use their individual returns, corporate returns and profit and loss statements in demonstrating their income.

There are a few differences in how loans are processed and underwritten for self-employed borrowers.

1) An underwriter will want copies of two years of business and personal (if different) tax returns and a year-to-date profit and loss statement.

2) The income used to qualify you for your loan is an average of the previous two years adjusted tax returns and year-to-date profit and loss statements.

This looks more complicated than it is, but if you really want to know how an underwriter would adjust your income, we have provided a guide. This guide for self-employed borrowers, adjusts the gross income as an underwriter might to evaluate credit worthiness on a mortgage loan.

From your individual tax return (1040)

1) Begin with your adjusted gross income

2) Add to this figure:

A) Tax-exempt interest income

B) Schedule C, Business Income or Loss - Depletion and Depreciation

C) Non-taxable IRA, Pension, Annuity, Social Security distributions

D) Schedule E and F - Depreciation

E) IRA Deductions

F) Self-Employed Health Insurance

G) Keogh Retirement Plan

H) Penalties For Early Withdrawal

I) Form 4562 Amortization and Form 8582 Carryovers

3) Subtract from this figure:

A) Wages, salary considered elsewhere

B) Taxable interest, dividend and refund income

C) Meals and Entertainment exclusion on Schedule C

D) Any Unemployment Compensation

E) Form 2106 Unreimbursed expenses (not fully deductable)

F) Form 8582 Unallowed Losses

Total individual return

If you show enough income to qualify for loan above, then quit. Otherwise, if a self employed borrower can show evidence of access to funds of the corporation continue with the following.

From Form 1120

A) Begin with Taxable Income and Subtract out Total Tax

B) Add Back Depreciation and Depletion

C) Subract any mortgages, bonds or notes payable in less than one year

D) Multiply this by borrower's percentage of ownership

E) Subract dividend income reflected on borrower's individual tax returns

Total corporate income available to borrower