Income, Your Mortgage File

Writing It All Off

A frequent issue I encounter in working with self employed borrowers is the difference between gross and net income.  Here is a loose definition of gross income:


Basically, gross income is the difference between all the sources of income and the cost of goods sold.  A solid business has a healthy gross income.

However, net income (or loss) is the gross income minus all expenses. A business has many expenses including wages, marketing costs, and costs they incur to run the operations. In the mortgage industry, we use the net income(loss) with a few exceptions.

Basically, we want to know what income is left over after all the bills have been paid. Many self employed borrowers want us to use the gross income and get quite upset when we are unable. To help rationalize this, let’s consider an example:

A business owner has a gross annual income of $50,000. However, they spend $5,000 in marketing, $2,000 on meals and entertainment, and $3,000 on office products. These are actual expenses where money left the business and paid for expenses the company needed in order to operate. Can that $10,000 in expenses be used to repay the mortgage? No. It was actual money spent on certain costs.

Hopefully you can understand that money that was actually used to pay bills or expenses can in no way be used to repay the mortgage debt and therefore can not be used as income. Tough, I know but lenders want to know what income is actually available to repay the debt.

I am not an accountant so I won’t be able to tell you how to complete your business return to the benefit of obtaining a mortgage loan. I would seek the advice of a CPA or the IRS at


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