How we read business-owner income
Sunrise qualifies self-employed income by reading the documents that actually reflect how your business earns: bank statements, K-1s, 1099s, and CPA-prepared P&Ls. We do not require tax returns for Non-QM programs and do not reduce income by Schedule C deductions.
By Sunrise Lending
The conventional lender problem
The conventional lender problem
What you need to know
- Bank statements: average monthly deposits × (1 − expense factor); no Schedule C reduction
- 1099 income: 24-month gross average with expense factor; no SE tax deduction required
- K-1 income: ordinary business income + add-backs (depreciation, depletion, amortization)
- P&L (CPA-prepared): qualifying income from net income before certain non-cash deductions
- Asset depletion: liquid assets ÷ loan term (months) = qualifying monthly income
- DSCR: property rental income only; personal income not used for investment property qualification
About this
Bank statement income methodology
The bank statement program averages monthly business deposits over 12 or 24 months, then applies an expense factor — typically 50% — to estimate operating costs. The remaining 50% is qualifying income. If your CPA can document that your actual expense ratio is lower (say, 35% for a service business with minimal hard costs), a CPA letter overrides the default and increases qualifying income.
The key feature: Schedule C deductions — depreciation, vehicle expenses, home office, meals, travel — do not reduce the bank statement income calculation. The lender is reading your deposit flow, not your tax return.
K-1 and S-corp income methodology
K-1 income from a partnership or S-corp is qualified on the ordinary business income (Box 1) plus non-cash deductions that reduce taxable income but don't represent actual cash outflows: depreciation, depletion, and amortization are added back. The officer reviews 2 years of K-1s and the business tax return to construct the qualifying income figure.
For an S-corp owner receiving both a W-2 salary from the company and K-1 distributions, both components are included. The W-2 verifies the salary side; the K-1 + 1120S adds the pass-through income.
1099 income and independent contractors
1099 income is qualified on a 24-month average of gross 1099 receipts, with an expense factor applied. The default expense factor is 50% (same as bank statements), but a CPA letter documenting actual expenses can adjust it. Unlike conventional underwriting, we do not run the income through Schedule C and reduce by all reported business expenses — we read the gross 1099 income and apply a standard expense assumption.
Asset depletion for high-net-worth borrowers
Borrowers with significant liquid assets — brokerage accounts, savings, restricted stock vesting — but modest tax-return income can qualify using asset depletion. The lender divides the eligible liquid asset balance by the remaining loan term in months to produce a monthly qualifying income figure. A $3,000,000 brokerage account divided by 360 months (30-year loan) = $8,333/month qualifying income — regardless of what the 1040 shows.
Common questions
- Why does my Schedule C income look so low to lenders?
- Schedule C income is your gross revenue minus all deductions your accountant took — depreciation, vehicle, home office, meals, travel. A thorough tax strategy minimizes that number. Conventional lenders use it as-is. Bank statement programs bypass Schedule C entirely and read your actual deposits.
- Can I use both bank statement and W-2 income?
- Yes — some borrowers have both self-employment income and W-2 income from a different role. Both can be included in qualifying income under most programs. The officer reviews all income sources and documents each appropriately.
- What if my deposits vary month to month?
- The 24-month average smooths seasonal variation. Lenders look for a stable or growing trend. A business with variable deposits but a clear upward trend over 24 months qualifies on the average. A business with a single outlier month is treated more skeptically.
- Does our underwriting require 2 years of self-employment?
- Most bank statement and 1099 programs require 2 years of self-employment history. Some programs accept 12 months for borrowers transitioning from the same field in a W-2 role — for example, a physician moving from a hospital W-2 to an independent practice.
- How do you read K-1 income from multiple partnerships?
- Each K-1 is reviewed separately — ordinary income plus non-cash add-backs for each entity. All qualifying K-1 income is summed. Losses from one entity may reduce income from another depending on the program. The officer reviews the full K-1 package.
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Related resources
Sources
- 1.Internal Revenue Service (IRS). Schedule C — Profit or Loss from Business — Accessed June 2026
- 2.Consumer Financial Protection Bureau (CFPB). Ability-to-Repay and Qualified Mortgage Standards — Accessed June 2026
- 3.Internal Revenue Service (IRS). Schedule K-1 — Partner's Share of Income — Accessed June 2026
Income methodology varies by lender and program. The descriptions above represent common Non-QM approaches; specific lenders may apply different expense factors, look-back periods, or add-back rules. Not a commitment to lend.
Sunrise Lending · Equal Housing Opportunity. Matching rules are written and reviewed by licensed mortgage professionals. All loan decisions are made by licensed mortgage professionals. Not a commitment to lend. Loan approval subject to underwriting guidelines. This is not financial advice.