Why a pre-approval letter can differ sharply from what underwriting actually approves for a self-employed buyer
Take a case worth studying in mortgage brokerage. A self-employed buyer pursuing a small duplex, say $268,000, both sides rented, brings paperwork to a broker who produces a pre-approval letter for $340,000 the next day based on the gross revenue off the buyer's 1099s, roughly $118,000. The buyer writes an offer, gets accepted over one other bid, puts down earnest money, pays for an inspection and an appraisal. At underwriting, income often gets calculated differently. Underwriting typically uses Schedule C income after expenses, which for a buyer writing off a truck and materials can average closer to $54,000 across two years rather than the gross figure. Debt to income can go from comfortable to unworkable, and the file gets declined, sometimes as late as eleven days before closing. If the buyer waived the financing contingency at day 21 on the strength of the pre-approval, that contingency has already expired by the time underwriting declines the file. The seller may keep part of the earnest money, and the inspection and appraisal costs are simply gone. The uncomfortable part of this pattern is that nobody necessarily misrepresents anything. A buyer answering the question of what they make with the number at the top of their tax return is answering honestly, because that is the number most people think of as their income. Nobody asks for the bottom of it early enough. The fix: bring two years of full tax returns to the first meeting and ask a broker to write down, in front of the buyer, exactly what income figure is being used and where it came from. And treat a pre-approval letter as an opinion rather than a decision before waiving any financing contingency on the strength of it.
