How to Calculate a Mortgage for the Self-Employed


Getting a mortgage is a complicated process–especially if you're self-employed. Because self-owned businesses are more likely to fail, banks tend to view the self-employed as a higher risk. That doesn't mean you can't buy a house if you own your own business. It just means that the process becomes more complex. If you keep good records and do your calculations correctly, you stand a good chance of borrowing.

Things You'll Need

  • Past tax returns
  • Calculator
  • Paper and pencil
  • House listings with tax information
  • Mortgage calculator
  • Word processor/spreadsheet (optional)
  • Write down your income for the past two years or more. You must be self-employed in the same industry for two years or more to qualify for a mortgage. Remember to exclude any business expenses. Use only your net income.

  • Add your income totals together, then divide by the number of months. For two years' worth of tax returns, you would divide by 24. This produces your average monthly income as figured by lenders.

  • Multiply your monthly income by 0.38, or the back ratio for your loan. This produces the maximum amount your lender will allow you to spend on your house. The number should be lower than 33 percent of your monthly income. If it isn't, use 0.33 for your calculations instead. This is the maximum amount that lenders allow for housing costs.

  • Look at home listings in your area. Use the property tax information on the homes you're interested in to determine the monthly cost of owning in addition to your mortgage. Simply divide the yearly tax by 12. If you know what homeowners insurance would cost, add this in, too. Subtract these figures from your maximum housing costs total.

  • Enter the total that results from Step 4 into the payment area of your mortgage calculator. Then put in the current fixed interest rate. If you have less than 20 percent of your house cost for your down payment, add half a percentage point to the rate. This covers mortgage insurance, which most lenders require for lower down payments. Press “Calculate” and you should receive the maximum amount you can borrow.

  • Add your available down payment to your maximum mortgage amount. The result is the maximum purchase price for your home.

Tips & Warnings

  • Do your calculations twice or more to prevent errors.
  • Provide as much documentation to your lender as possible.
  • Use a spreadsheet to make recordkeeping easier.
  • Self-employed borrowers are regarded as higher-risk – you may be refused.
  • Keep an eye on your mortgage – lenders make mistakes, too.
  • You must have two years of employment in the same job to get a mortgage.

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