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A self-employed borrower claims $120,000 annual income. The lender requires two years of tax returns. Year 1 shows $110,000 and Year 2 shows $130,000. What income figure will the underwriter most likely use for qualification?

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$120,000 (average of two years) $65,000 (half of the average) $110,000 (lower year) $130,000 (most recent year)

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Correct answer: $120,000 (average of two years)

For self-employed borrowers, underwriters typically average the two most recent years of tax returns to determine qualifying income. ($110,000 + $130,000) / 2 = $120,000. If income is declining, the lower figure may be used instead.