How Lenders Calculate Your Income

How lenders calculate W-2 income: Base salary is straightforward. Overtime, bonuses, and commissions require a 2-year history and must be likely to continue. If income is declining, lenders use the lower year.

The self-employed income surprise: Lenders use your Adjusted Gross Income (AGI) from your tax return — not your gross revenue. Every write-off reduces your qualifying income. However non-cash expenses like depreciation are added back.

⚠️ The AGI trap: SEP IRA contributions, health insurance deductions, and half of self-employment tax all reduce your AGI — and therefore reduce what lenders count as your income. A $300K earner who contributes $60K to a SEP IRA qualifies on $240K. Always review your AGI before applying.

1099 Contractor income: Lenders average your last 2 years of 1099 income. If income is declining they use the lower year. Business expenses on Schedule C are deducted. A bank statement program may show significantly higher qualifying income if you have large write-offs.

Bank Statement loans — the write-off solution: Instead of tax returns, lenders use your actual bank deposits. Personal accounts typically use 50% of deposits. Business accounts use 50-90% depending on your documented expense ratio. No tax returns required.

RSU (Restricted Stock Units) — the overlooked Bay Area income: RSUs are fully countable qualifying income if they have vested for at least 2 years AND will continue vesting for at least 3 more years. This is extremely common for tech workers and is frequently left off applications — costing borrowers significant purchasing power.

✅ Requirements: RSU vesting agreement required · Must show 2-year vesting history · Must continue for 3+ more years · Taxed as ordinary income when vested · Use 2-year average of vested value (not grant value)

Asset Depletion — qualify on what you have, not what you earn: Perfect for retirees, business owners with retained earnings, and high net worth individuals. Lenders divide your eligible liquid assets by 60-72 months to create a monthly qualifying income — regardless of your actual income.

⚠️ Eligible assets only: Checking/savings (100%) · Stocks/bonds/mutual funds (70% of value) · Vested retirement accounts (60-70% of value) · Money market accounts (100%). NOT eligible: business accounts, non-vested options, real estate equity, cryptocurrency (most lenders).

How rental income is calculated: Lenders apply a 25% vacancy factor to gross rents, then subtract the full PITIA (principal, interest, taxes, insurance, HOA). Net positive income adds to qualifying. Net negative income counts against you — and cannot be ignored.

VA / Military income: All military pay components count toward qualifying income. Non-taxable allowances (BAH, BAS) can be grossed up 25% — meaning lenders treat $1,000 of BAH as $1,250 of qualifying income. This is a significant benefit unique to military borrowers.

Retirement & Social Security income: Must continue for at least 3 years to count. Social Security and other non-taxable income can be grossed up 25% — a significant benefit. Must provide award letters and retirement account statements.