Adjusted Gross Income


So you received a hot lead.  Application is going well.  You're building rapport, pulled credit, 800 FICO for he and the wife.  Woo-hoo!  Things are looking good.  I can almost count the money.  Now we get to income and guess what?  That's right, your customer is self-employed.  Great.  The deal killer.  Why is it so hard for someone who is self-employed to qualify in today's lending environment?  What happened to the good ol' days?  The good ol' 80/20 self-employed, stated income loans?  Well folks those days are long gone.  Could we see those days again?  Possibly, but not anytime soon.  S0, what are you going to do as a Loan Officer?  You have to adapt to current market.  What is the best way to deal with the self-employed borrower?  Well, the easy thing to do would be to ask Mr. Smith how much his annual income is, complete the pre-qualification and hope for the best.  The rationale being, "well, surely he knows how much he makes so I should just take him at his word, right?"  Wrong!

A good Loan Officer digs a little deeper.  Ask the right questions to ensure a high pull-through ratio.  What are the right questions to ask someone who is self-employed?  Well, for one, is the business a Sole-Proprietorship, Partnership, Corporation or an S-Corporation?  If it's a Sole-Proprietorship then the next question should be, "do you have last year's tax return with you? Great, tell me what line 37 says for your Adjusted Gross Income."  That's right, adjusted gross income (income after expenses) is typically going to be the income that is used to qualify a self-employed customer wanting a loan.  Underwriting is going to take the last 2 years tax returns and average the business's net income over the past 2 years and use that income for qualification.

 You also need to have an idea of what the business has made year to date because a year to date profit and loss statement will also probably be requested by Underwriting.  Pay careful attention to declining income from one year to the next.  If there was declining income this will raise a red flag with Underwriting and can sometimes lead to a loan being declined even if the 2 year income averages out.   A top producing loan officer will take the pre-qualification phase one step further and have the borrower physically send in the tax returns prior to locking in the loan or taking the formal application (sending the loan to Underwriting).  While asking the right questions will work most of the time and will eliminate a lot of your cancels, you will, from time to time, encounter a customer that will still tell you their gross income instead of their adjusted gross.  Whether intentional or not, it happens quite a bit.  Certain expenses, depreciation for example, can be added back to the income and can help with the income qualification.  Because of things like this you as the loan officer almost always need to physically review the tax returns in order to properly calculate a self-employed customer's income.

The only fool-proof method to properly pre-qualify a self-employed customer is to ask the right questions and then physically review the tax returns prior to locking in the loan.  As a top producing loan officer you only have so many hours during the day.  You want to devote your time to following up with customers who you know stand a good chance of  funding.  Sadly, because self-employed customers write off so many expenses, very few will actually make it to funding.  Out of every 10 self-employed customers you talk to on the phone, you will be able to pre-qualify maybe 1.  It's sad but true.  This is the environment you are in now so adapt to it.  Learn the rules, adopt the proper pre-qualification techniques and watch your pull-through ratio sky-rocket.  Let all of the average Loan Officers spend countless hours following up with borrowers who stand no chance of funding.  Self-employed borrowers, unless the proper steps above are taken prior to lock, will clog up your pipeline, waste a lot of your time and will lead to most of your cancels.  Save yourself and your borrower a lot of time and frustration and possibly your borrower's earnest money deposit by taking the proper steps prior to locking in the loan.