Self-Employed? Why Your Tax Return May Be Hurting Your Mortgage Approval

Being self-employed has plenty of advantages: you control your business, build something of your own (that you own!), and can create a legacy through your work.  And, an experienced CPA can help you significantly reduce your taxable income through business deduction strategy.

But, then comes the time when you want to apply for a mortgage and all of those creative CPA ideas could start working against you.

Why Self-Employed Income Is Different

Traditional mortgage underwriting generally looks at documented qualifying income—not simply how much money flows through your business. For self-employed borrowers, tax returns often play an important role in determining that income.

The problem? Business owners frequently have legitimate deductions that reduce taxable income. That's great when April 15 arrives. It can be less great when you're trying to qualify for a $700,000 house.

Revenue Isn't the Same as Qualifying Income

Commonly, I have business owners tell me how much "they made" or "the business made" in the prior year, but when we get down to the income qualifying, I have found that the better and more creative of a CPA they are employing, the less favorable it looks on a loan application.

Gross revenue and mortgage qualifying income aren't the same number. Your CPA and your mortgage underwriter are looking at your business through very different lenses.

There May Be Other Options

Traditional conventional financing isn't the only option for self-employed borrowers, however.

Depending on the situation, alternative mortgage programs allow income to be evaluated using things such as:

• Business bank statements

• Personal bank statements

• Asset-based qualification

• Profit/Loss Statements

• 1099 income documentation

• Other alternative income documentation

Bank-statement loans, for example, may evaluate deposits over a period of time rather than relying on traditional tax-return income calculations. These programs typically have different rates, down-payment requirements, and underwriting guidelines than conventional financing.

Flexibility rarely arrives completely free.  I tell folks that there is a scale of convenience and cost.  The more flexible/convenient a loan is, most commonly the more expensive the product ends up being.  Not always the case, but often this is true.

Planning Ahead Matters

If you're self-employed and considering buying a home, don't wait until after you've filed your tax returns to have the mortgage conversation. Your tax strategy and mortgage strategy can affect one another.

That doesn't mean you should pay unnecessary taxes just to qualify for a mortgage. It means your CPA, financial advisor, and mortgage professional should ideally not be operating in three completely separate universes.

Key Takeaway

Self-employed borrowers can absolutely qualify for mortgages. But the process often requires more strategy than simply looking at annual revenue.

If you're a business owner, freelancer, 1099 contractor, or entrepreneur, talk with a lender early and find out:

What income will actually be used to qualify me?

You may qualify exactly as you are. You may need some planning. Or there may be another loan structure that fits your financial picture better.

Running a successful business is already complicated enough. Your mortgage doesn't need to become your second business.

-Brian Kimball, Sr. Mortgage Advisor/Team Leader, The Lighthouse Group at Waterstone Mortgage