2-year average
How conventional lenders handle self-employed income variability: they average qualifying income across the two most recent tax return years. If year 1 was $80,000 net and year 2 was $100,000, qualifying income is $90,000/year ($7,500/month). A declining income trend may cause lenders to use only the lower year.
How does this affect your loan? Estimate self-employed qualifying income with the DTI calculator, or read the self-employed mortgage guide.
Related terms
- Depreciation add-back — Depreciation is a non-cash expense — it reduces Schedule C net income without representing real money leaving…
- Rising income / declining income — Income trend affects how lenders apply the two-year average. Rising income (year 2 higher than year 1) is favo…
- Add-back — A non-cash or one-time business expense that can be added back to Schedule C net income when calculating quali…
- 1099-NEC / 1099-K — IRS forms reporting non-employee compensation. 1099-NEC covers freelance and contractor income paid by clients…
- W-2 income — Employer-reported wages documented on a W-2 form. Treated by lenders as the most verifiable income type — full…
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Sources
Educational definition only — not financial, legal, or tax advice. Programs and limits change; verify current terms with a licensed professional.