What income do lenders typically use for calculating mortgage affordability for self-employed borrowers?

What income do lenders typically use for calculating mortgage affordability for self-employed borrowers?

• A. Gross income
• B. Net profits
• C. Net income after taxes
• D. Annual salary

Answer: (B)

Lenders typically use net profits to calculate mortgage affordability for self-employed borrowers. This approach reflects the actual earnings of the borrower after deducting business expenses. Unlike gross income, which does not account for the costs associated with running a business, net profits provide a clearer picture of what the borrower can realistically afford to repay. Using net profits allows lenders to better assess the borrower's financial situation, as it represents the income available after the necessary expenses have been accounted for. This is particularly significant for self-employed individuals, whose income can fluctuate based on their business performance. In contrast, gross income does not consider expenses, net income after taxes assumes the borrower has already paid their taxes, and annual salary is more typically used for salaried employees rather than those who are self-employed. Thus, net profits offer a more accurate basis for evaluating a self-employed borrower's ability to manage mortgage payments.

Lenders typically use net profits to calculate mortgage affordability for self-employed borrowers. This approach reflects the actual earnings of the borrower after deducting business expenses. Unlike gross income, which does not account for the costs associated with running a business, net profits provide a clearer picture of what the borrower can realistically afford to repay.

Using net profits allows lenders to better assess the borrower's financial situation, as it represents the income available after the necessary expenses have been accounted for. This is particularly significant for self-employed individuals, whose income can fluctuate based on their business performance.

In contrast, gross income does not consider expenses, net income after taxes assumes the borrower has already paid their taxes, and annual salary is more typically used for salaried employees rather than those who are self-employed. Thus, net profits offer a more accurate basis for evaluating a self-employed borrower's ability to manage mortgage payments.