How Banks Calculate Self-Employed Income (And Why It Feels So Confusing)

If you’re self-employed and have ever applied for a mortgage, you’ve probably thought: “I make good money… so why is the bank acting like I don’t?” You’re not alone. Banks look at self-employed income very differently than they look at a regular T4 salary, and that’s where most of the frustration comes from.

Let’s break it down in plain English.

Why banks don’t just look at what you make

When you’re an employee, income is simple: your salary is your salary. When you’re self-employed, income is… complicated.

Banks care less about how much money flows through your business and more about how stable and predictable your income looks on paper. They want to know:

• Is this income consistent?

• Will it likely continue?

• Can you handle mortgage payments long-term?

That’s why they rely so heavily on tax documents instead of your bank deposits.

The main number banks care about: your net income

Here’s the part that catches most people off guard.

Banks usually use your net income (after expenses), not your gross revenue.

So if you made:

• $120,000 in revenue

• but after expenses you claimed

• $65,000 in net income

The bank typically qualifies you on $65,000, not $120,000.

Totally fair for taxes… not always fair for mortgages 😅

The 2-year average rule

Most lenders want to see two years of self-employed income. They’ll usually:

1. Look at your last 2 years of tax returns

2. Take the net income from each year

3. Average them together

Example:

• 2023 net income: $60,000

• 2024 net income: $70,000

• Bank qualifying income: $65,000

If your income is rising, some lenders will use the most recent year — but not all.

What documents banks usually ask for

Expect to provide things like:

• Last 2 years of T1 Generals

• Notice of Assessments

• Business financials (for corporations)

• Sometimes bank statements or contracts

It’s not them being nosy — they just need proof your income is legit and sustainable.

Why write-offs can hurt (even though they help at tax time)

This is the trade-off of being self-employed.

Claiming lots of expenses =

✅ Lower taxes

❌ Lower qualifying income for a mortgage

So if you’re planning to buy in the next year or two, it might be worth talking to your accountant and mortgage professional about finding the right balance between tax savings and mortgage power.

Are there other options? Yep.

If your tax income doesn’t tell the full story, you still have choices:

• Stated income programs (for strong credit + solid down payment)

• Alt-A or B lenders who look more at cash flow

• Bank statement programs

• Private lending as a short-term step

These aren’t “bad” options — they’re just different tools for different situations.

In conclusion...

Banks aren’t trying to make life harder for self-employed people — they just play by rules that weren’t built for entrepreneurs.

Once you understand:

• what income they use

• how they average it

• and what hurts vs helps

you can plan smarter, qualify stronger, and avoid nasty surprises when it’s time to apply.

If you’re self-employed and thinking about buying, refinancing, or renewing, a little prep goes a long way — and having someone in your corner, who has been through this process already himself, who gets self-employed income makes all the difference.