If you’re self-employed, calculating your mortgage loan requires more than just plugging numbers into a formula. While the math for monthly payments is the same as for traditional employees, lenders evaluate income differently, which directly impacts how much you can realistically borrow. In this guide, we’ll break down the calculation process step by step. For a full foundation in mortgage math, start with our mortgage loan calculation explained guide
1. The Standard Mortgage Formula
Regardless of employment type, the formula for monthly principal and interest is:
M = P × [ r × (1 + r)^n ] / [ (1 + r)^n – 1 ]
Where:
M = Monthly payment
P = Loan principal (amount borrowed)
r = Monthly interest rate (annual ÷ 12)
n = Number of payments (loan term × 12)
Example:
Loan = $250,000
Rate = 6% (0.005 monthly)
Term = 30 years (360 payments)
Result: ≈ $1,499/month (before taxes, insurance, and PMI).
2. How Lenders Calculate Self-Employed Income
Here’s where things differ. Lenders don’t simply use your gross revenue—they use net income after deductions, often averaged over the past 1–2 years of tax returns.
For example:
Your business earns $120,000 gross.
After deductions, your taxable income is $80,000.
Lender uses $80,000 (or an average of two years) for qualification.
This lowers the income base used for debt-to-income ratio (DTI) calculations, which determines loan eligibility.
3. Step-by-Step Self-Employed Calculation
Determine Income – Use your adjusted net income from tax returns.
Apply the 28/36 Rule – Housing costs ≤ 28% of gross income; all debts ≤ 36–43%.
Estimate Loan Amount – Plug your max housing budget into the mortgage formula.
Add Taxes & Insurance – Remember to include PITI and PMI if applicable.
Example:
Net income = $80,000/year → $6,667/month
Max housing = 28% → $1,867/month
Loan supported ≈ $310,000 at current rates
4. Special Considerations for Self-Employed Borrowers
PMI – Required if down payment <20%.
Stricter DTI Caps – Lenders may cap closer to 36–40% vs. 43–50% for W-2 borrowers.
Stability – Gaps in income or declining year-over-year revenue may reduce approved amounts.
Documentation – Tax returns, profit & loss statements, and bank records all factor into lender evaluation.
5. Strategies to Improve Your Calculations
Reduce deductions if you plan to buy soon (higher reported income helps).
Pay down debts to improve your DTI ratio.
Build a larger down payment to lower principal and avoid PMI.
Use a conservative estimate of income when calculating affordability.
6. Tools That Can Help
Pair manual calculations with online resources:
Mortgage Calculator – To estimate principal + interest.
DTI Calculator – To check if your income supports the payment.
Amortization Schedule – To see long-term payment breakdown.
Conclusion
For self-employed borrowers, calculating a mortgage loan involves the same formula as everyone else—but with an important twist: your income is measured differently. By factoring in net income, DTI limits, and lender scrutiny, you can calculate more realistically and avoid surprises during the approval process.