Self Employed Income Question

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  • #39794
    lamber
    Member

    Hi all,

    I had my intake meeting last week and still have an unresolved question. There is lots of useful information on this forum and I have searched but still don’t have a clear answer on how NACA calculates income for self employed individuals.

    My MC told me to fill out the past 12 months of my bank statements with BD (Business Deposits) and BE (Business Expenses) and tally them up each month for a net profit. He also said I should file my 2017 tax return before my next meeting in February. When I asked him how does NACA reconcile my bank statement income and my 2017 tax return income since they will probably be different (mostly due to a large mileage tax deduction) he told me twice not to worry about it and just fill it out (I don’t mean to criticize the MC because he seems like a go-getter who just wants to get me to the next step in the process).

    With that said, does anyone know how NACA calculates self employment income? Is it an average on past 2 tax returns? An average of most recent tax return with most recent 12 months of bank statements? Or if they are close enough they go with the net profit of my schedule C on most recent tax return?

    Thanks in advance for the help!

    #39797

    I don’t have any clear answers, but I can share a few data points from my experience:

    I am on W2 income. My income tripled in the second half of 2015, and I’ve been making that higher income for 2.5 years, but my income for affordability (DTI ratio) purposes was calculated by averaging my 2015 and 2016 tax returns, making my income look lower.

    My husband is self-employed, and we take a sizable ($4000+) home office deduction (rent is very expensive here, and the office room is 20% of our apartment space), but because that shows up as a business expense on federal tax returns, his adjusted gross income appears to be $4000 less than it actually is. (We didn’t circle rent as a business expense on the bank statement.)

    Combined, we appear to make about $25000 less this year than we actually made. I thought, no worries — we are doing great with our payment shock, have little debt, and should be fine. But what I realize is that indeed our max PITI will be capped to 31% of these numbers, rather than 31% if what we actually have been making for the past 2 years.

    #39798
    TTrumble
    Member

    Hello lamber,

    The method by which we calculate self employment is to take an average of the monthly income from the cash flow analysis and the self-employment tax filings.

    For example:
    1. The cash flow analysis shows $50,000 business earnings for the 12 month period (total business deposits minus total business expenses)
    2. The Schedule C (after adding back depreciation) shows $40,000.
    3. The income calculation is $50,000 + $40,000 / 24 = $3750 per month.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #39800
    lamber
    Member

    Thank you both for your responses.

    I am sorry to hear that Homesweetboston- hopefully you can qualify for a higher amount after you file your taxes this year.

    TTrumble- that is helpful. So if I understand you correctly, the Schedule C portion of the calculation is my net profit from Schedule C PLUS my mileage deduction added to it?

    Thanks again, this forum has helped clear things up for me and give me hope that this is an achievable process for me.

    #39916
    lamber
    Member

    @TTrumble

    In your example, you say that we add back the Depreciation in the Schedule C (Line 13 on Schedule C).

    I claim a large mileage deduction (around $18K) under Car and Truck Expenses (Line 9 on Schedule C).

    Since I don’t list my expense under “depreciation”, I would like to know if the Car and Truck Expense also gets added back to my income or if it is strictly the Depreciation expense (Line 13) that gets added back. I have read that other lenders adds back around 23 cents per mile that I deduct, so I hope Naca does something similar.

    Thanks for your help in trying to help me figure this out since it is one of the biggest factors in my affordability.

    • This reply was modified 3 years, 1 month ago by lamber.
    #40026
    TTrumble
    Member

    Hello lamber,

    Sorry it took me so long to respond. The Forum was pretty quiet for a while, then it suddenly got very active, and I wanted to double check with our internal helpline before I responded. Add that to the snowstorm here in Charlotte this week, and… whew.

    Unfortunately, the mileage will not be added back in. Only depreciation is added back into the income from your tax return. I hope it’s not too big a hit on your affordability.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #40030
    lamber
    Member

    Thank you much for checking Tim, the ice has finally melted mostly here in South Carolina.

    It is a bit of a bummer, but nothing that will stop me from forging ahead. Thanks again.

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