If you run your own business, you already juggle invoices, taxes, and growth plans. Add home‑buying to the mix and one big question pops up: Will my lender look at my gross revenue or the slimmer number left after expenses?
The answer shapes how much you can borrow—so let’s unpack the logic lenders use and how you can put your best financial foot forward.
Gross vs. Net: Know the Difference
- Gross income is the total money your business brings in before you pay a single bill.
- Net income is what’s left after rent, payroll, software subscriptions, travel, and every other deductible expense.
For salaried employees, the gap between gross and net is small and predictable. For entrepreneurs it can be vast—one reason lenders lean heavily on net income when measuring your ability to repay a mortgage.
Why Net Carries More Weight
Underwriters want to see the cash you actually keep, not the top‑line fireworks. A freelance designer might bill $180,000 a year, but if equipment, subcontractors, and taxes swallow half of that, only the remaining funds are available for living costs and a mortgage payment. Using net income gives the bank a clearer view of risk.
That doesn’t mean gross figures are ignored. Lenders often compare both numbers to spot red flags (think wildly fluctuating profits) and to verify the overall health of the business. Yet when it comes to the debt‑to‑income calculation—the ratio that decides how big a loan you qualify for—net income nearly always takes center stage.
How Lenders Crunch the Numbers
- Average the past two years. Most lenders total your net profits across two tax returns, then divide by 24 months to smooth out peaks and valleys.
- Adjust for non‑cash expenses. Depreciation or amortization may be added back because they lower taxable income without draining your bank account.
- Factor in existing debts. Credit cards, car loans, and other mortgages eat into your borrowing power; keeping balances low can expand it.
Beating the Paperwork Hurdle
Expect to hand over complete federal tax returns, profit‑and‑loss statements, and several months of business bank statements. Lenders need to confirm that the income you report on paper also shows up in deposits. Preparing organized, up‑to‑date books is the fastest way to move from application to approval.
Boosting Your Borrower Profile
- Trim Your DTI: Pay down high‑interest cards or refinance short‑term debt before applying.
- Build a Cash Buffer: A larger down payment reduces the perceived risk and can offset a modest net income.
- Stabilize Revenue: Avoid dramatic write‑offs in the year you plan to buy; consistent profits are more valuable than aggressive deductions.
- Polish Credit: On‑time payments and low utilization can nudge your score into the tier where the best rates live.
Specialized Loan Paths
If your tax returns don’t tell the whole story, consider alternatives. Bank‑statement loans use deposits rather than adjusted net income to prove earnings, while some niche products focus on asset balances or rental cash flow. Each comes with its own rates and requirements, so shop around.
Ready to Run the Numbers?
Knowing whether lenders will credit your gross or net income is only half the battle; seeing how that number translates into a payment you can comfortably absorb is next. Skip the guesswork and calculate your mortgage now.
A quick simulation can reveal your price range, spotlight areas to tweak, and turn the dream of homeownership into a clear, actionable plan—no spreadsheets required.