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How Banks Calculate Self-Employed Income for Mortgages
When a salaried employee applies for a mortgage, the bank looks at pay stubs – simple and efficient. For self-employed individuals, the picture is much more complex. The bank needs to "translate" your financial reports into language it understands: disposable income for repayment purposes.
The Banking Formula
Income for Mortgage = Average Net Profit (2 years) + Add-backs (depreciation, provisions) - "Personal" expenses - Existing liabilities
What Banks Add Back to Income (+)
Equipment depreciation
Accounting expense that's not cash – bank adds it back
Various provisions
Severance provisions, doubtful debts – didn't leave your pocket
What Banks Deduct from Income (-)
Vehicle expenses (50%)
Even if you reported 100% business – bank only recognizes half
Phone & insurance
Part considered personal expense
Existing loans
Monthly repayments on any loan hurt your debt-to-income ratio
Open credit facilities
Even unused – considered potential debt
Why Profitable Self-Employed People Get Refused
The Classic Self-Employed Dilemma
What You Do
Maximize expenses to pay less tax. Makes sense for you.
What the Bank Sees
Low net profit = low income = high risk. Refused.
The Result: Self-employed with millions in turnover get refused mortgages, while a salaried employee with half the "real" income gets approved easily.
Top 5 Reasons for Self-Employed Refusal
Net profit too low
Tax optimization = low income in bank's eyes
Income volatility
Large variance between years seen as instability
Young business
Less than two years = insufficient history
High credit facilities
Even if unused – considered a risk
Imperfect credit score
Minor past delays hurt self-employed more
RealFix Solutions for Self-Employed
Got refused for a mortgage? Don't give up. We have a toolbox of solutions tailored specifically for self-employed and business owners:
Strategic Tax Planning Before Mortgage
If you know you'll want a mortgage in 1-2 years, it's worth planning ahead. With your accountant, we'll build a strategy that balances tax savings with sufficient income for mortgage purposes.
Adding a Co-Borrower
A salaried spouse, parent with stable income – adding a borrower with stable incomecan significantly improve approval chances. We analyze who is the optimal co-borrower to add.
Increasing Equity
The higher your equity, the smaller the loan amount = lower risk = more bank flexibility. We check equity options: parents, existing properties, pension funds.
Non-Bank Financing
Insurance companies (Migdal, Harel, Clal) and institutional bodies offer mortgages with more flexible criteria. They look at assets, cash flow, and potential – not just dry reports.
Advantage: Approval even for self-employed with short tenure or low profit.
Disadvantage: Interest 0.3%-0.8% higher than banks.
Why RealFix Succeeds with Self-Employed
26 Years Experience
Thousands of self-employed refused by banks got solutions with us
Financial Report Experts
We know how to read reports like banks – and find the right angles
85%+ Success Rate
Even in cases refused two or three times
Important Tip Before Approaching a Bank
Don't submit a mortgage application before running a "simulation".Every refusal is recorded and hurts your chances at other banks. First come to us for a free assessment, we'll understand your real situation, and approach the right bank with a prepared file.