Do you need a self employed mortgage to buy your dream home, but your tax returns paint a less-than-ideal financial picture? Don’t worry – you’re not alone in this predicament. As a mortgage broker specializing in self-employed clients since 2003, I’ve helped countless entrepreneurs navigate the tricky waters of mortgage qualification. Today, I’ll share some insider tips on how to legally structure your taxes to boost your chances of securing the home loan you deserve.

Understanding Self-Employed Mortgage Qualification

First things first: let’s define what it means to be a self-employed borrower in the eyes of mortgage lenders. Fannie Mae and Freddie Mac consider anyone who owns 25% or more of a business to be self-employed. This distinction is crucial because it affects how your income is evaluated during the mortgage application process.

Underwriters typically require two years of tax returns and a year-to-date profit and loss statement from self-employed applicants. They’re looking at your taxable income, not your gross revenue. This is where many self-employed individuals run into trouble – all those deductions that help lower your tax bill can also make it harder to qualify for a mortgage.

The Five-Year Business Rule: A Hidden Advantage

Here’s a little-known fact that could work in your favor: if you’ve been in business for over five years, lenders may only require your most recent year’s tax return. This can be a game-changer if you had a particularly strong year recently but a weaker one the year before.

Maximizing Taxable Income for Mortgage Approval

Now, let’s talk strategy. How can you prepare your tax returns to maximize your chances of self employed mortgage approval?

Reduce deductions strategically: While it’s tempting to write off every possible expense, consider the impact on your mortgage application.

Keep clean records: Separate your business and personal accounts to make your financial picture clearer to lenders.

Review tax returns before filing: I often advise clients to send me a draft of their tax return before filing. This allows us to identify any potential issues and make adjustments if needed.

Deductions That Can Be Added Back

Some deductions can actually work in your favor during the mortgage approval process. Underwriters can add back certain expenses to your income, including:

• Depreciation

• Business mileage

• Home office deductions

For example, if you took a one-time depreciation on a business vehicle, that amount could potentially be added back to your income for qualification purposes. If you would like to take a stab at calculating your income from your own tax return use my self-employed mortgage calculator.

Alternative Documentation Loans for Self-Employed Borrowers

What if, despite your best efforts, your tax returns still don’t show enough income to qualify for the home you want? Don’t lose hope – there are alternative self employed mortgage options designed for situations like yours.

Bank Statement Loans

Bank statement loans allow you to qualify based on 12 or 24 months of bank statements rather than tax returns. Lenders typically use 50% of your deposits as qualifying income, but this can increase to 80% for businesses with low overhead, like consultants working from home.

Asset-Based Loans

If you have significant assets but low taxable income, an asset-based loan might be the answer. These loans consider your overall financial picture, including cash, stocks, and retirement funds. You might need to put down a larger down payment (around 30%) and show reserves equivalent to 60 months of mortgage payments.

No Income Documentation Loans

Yes, these still exist! With a minimum 25% down payment, sufficient reserves (6-12 months of mortgage payments), and a good credit score, you may qualify without providing any income documentation.

DSCR Loans for Real Estate Investors

For investment properties, Debt Service Coverage Ratio (DSCR) loans are an excellent option. These loans are based on the property’s cash flow rather than your personal income, making them ideal for
real estate investors
.

Tips for Self-Employed Home Buyers

As we wrap up, here are some key takeaways for self-employed individuals looking to buy a home:

• Always show your tax returns to your mortgage professional before getting pre-approved.

• Consider alternative loan options if traditional routes don’t work for you.

• Plan ahead – structure your taxes with mortgage qualification in mind.

• Don’t be afraid to seek professional advice. A mortgage broker experienced in working with self-employed borrowers can be invaluable.

Remember, being self-employed doesn’t have to be a roadblock to homeownership. With the right strategy and guidance, you can navigate the self employed mortgage process successfully and move into the home of your dreams.

FAQ (Frequently Asked Questions)

How long do I need to be self-employed to qualify for a mortgage?

Most lenders require a two-year history of self-employment. However, if you’ve been in business for over five years, you may only need to provide the most recent year’s tax return.

Can I use business funds for my down payment?

Yes, you can use business funds for your down payment, but you’ll need to show that using these funds won’t negatively impact your business operations. Your lender may require additional documentation to verify this.

Are interest rates higher for self-employed borrowers?

Not necessarily. Interest rates are primarily based on your credit score, loan-to-value ratio, and the type of loan you choose. However, alternative documentation loans like bank statement loans may have slightly higher rates than traditional mortgages.

What if my business had a bad year recently?

If you’ve been in business for over five years and had a strong recent year, you might be able to use just that year’s tax return. Otherwise, lenders typically average your income over two years, which can help smooth out fluctuations.

Can I get a mortgage if I just started my business?

It’s more challenging, but not impossible. You may need to explore alternative documentation loans or FHA loans, which can be more flexible with their requirements. Having a strong
credit score and significant assets can also help your case.