What Lenders May Add Back From Self-Employed Write-Offs

Yes, business write-offs can lower the income a lender counts, but not all of them. Fannie Mae's guidelines tell lenders to add certain recurring Schedule C deductions back to your cash flow. Those include depreciation, depletion, business use of a home, amortization and casualty losses.

Fannie Mae's Schedule C guideline lists these five as add-backs. Your other deductions may still count against your income, and the lender will need to determine how each one is treated in your file. So the real question isn't how low your taxable income looks. It's which of your write-offs are on that list.

Why your tax return isn't the final number

Fannie Mae says the lender may need to adjust the net profit or loss shown on Schedule C to arrive at your cash flow.

Your bottom line on Schedule C is a starting point, not the answer. The lender reviews what went into it and may add some items back or subtract others.

That review is written down. Fannie Mae's documentation rules for self-employed borrowers require the lender to prepare a written evaluation of your self-employed income. It can use Cash Flow Analysis (Form 1084), another type of cash flow analysis, or an automated tool.

The write-offs that may be added back

Under Fannie Mae's guideline on Schedule C income, these recurring items you claimed must be added back to the cash flow analysis:

Depreciation
Depletion
Business use of a home, which the IRS also calls the home office deduction
Amortization
Casualty losses

If any of these show up on your Schedule C, they may not count against you the way your taxable income suggests. Your tax preparer can point to where each one sits on your return, so you know what to ask a lender about.

What about your other deductions

The guideline lists these five as add-backs. Your other business expenses may still count against your income, and the lender will need to determine how each one is treated in your file.

Income can move the other way as well. Fannie Mae tells lenders to decide whether income is recurring. If something on your Schedule C was a one-time item, the lender should deduct that nonrecurring income from your cash flow.

The home office write-off and renters

This one matters if you rent and work from home. The IRS page on the home office deduction says the home office deduction is available to homeowners and renters. To claim it, you generally must regularly use part of your home exclusively for business.

So a renter who writes off a home office may have a deduction that the lender adds back. Your buying power could be higher than your taxable income suggests. Only a full review of your returns can tell you by how much.

Conditions that change the answer

The add-back list above comes from Fannie Mae's guideline for Schedule C income. A few things can change how your file is treated:

Loan program. If your loan isn't a conventional loan following Fannie Mae's guidelines, a different list may apply.
Where your business income is reported. This list covers income on Schedule C. If your business income shows up somewhere else on your return, ask your lender which guideline applies.
Your lender's review. Even on the same program, the lender will need to determine what counts as recurring in your file.

Your next step

Before you assume your write-offs rule you out, have a lender walk through your returns line by line. Start with what to gather to get pre-approved in Colorado, and read more about buying a home with a Colorado mortgage.

When you're ready, book a time with Diane to look at what your returns may support. You can also call Diane at 719-687-2112.

Diane also helps buyers in Arizona, Montana and Florida.

Diane Beaumont, Mortgage Loan Originator, NMLS #247026. Benchmark Mortgage, a dba of Ark-La-Tex Financial Services, LLC, NMLS #2143. Equal Housing Lender. Not a commitment to lend.