Lenders underwrite income on salaried borrowers versus self-employed borrowers differently. If you are salaried, the lender will use your current gross base income as your qualifying income.  They do want to see a 2-year history of employment without any gaps, and stable or rising income over the most recent 2 years.  If there is a small gap in jobs, it usually is not a huge deal, although we may have to explain the reason for the gap.

The income of a self-employed person is scrutinized much more closely due to its fluctuating nature. Firstly, this is what an underwriter looks for:

1. A 2-year history of self-employment income
2. Stable and/or rising income from one year to the next

In determining your monthly income amount, the underwriter reviews Schedule C of your tax returns and calculates your income on the following lines:

The underwriter will run this calculation for the most recent 2 years and divide it by 24 months to determine your monthly income, which is used in your qualifying ratio.*

So self-employed = 24 month net income average; salaried = current gross.

As you can see, they use your net income, not your gross receipts or sales, so it is the income after all your expenses.  The logic behind this is that the expenses are what keep your business going and that it more accurately portrays your true income.  The fact that net income is used instead of gross can have a negative effect on qualifying for a mortgage since most self-employed individuals try to write off as much as possible against their business.

*Qualifying ratio: Your Debt-to-Income ratio, which takes the total monthly housing payment (mortgage, taxes & insurance) + the minimum monthly payments from your credit report (student loans, car loans, credit card debt) divided by your monthly gross income.  Your ratio needs to be at 45.0% and below to qualify.