Hey there! If you’re self-employed and considering getting a home mortgage, you might feel like it’s a bit of a maze. But guess what? Depreciation can work in your favor and make the whole process a lot easier. Let’s dive into how this works.

What’s Depreciation Anyway?

In simple terms, depreciation is how you spread out the cost of big-ticket items you buy for your business over several years. Think about things like equipment, vehicles, or even real estate. These items lose value over time, and you get to deduct that loss from your income on your taxes.

Why Depreciation is Your Friend

Lower Taxes, More Cash
When you depreciate assets, your taxable income goes down. That means you pay less in taxes BUT keep more cash in your pocket.
Better Debt-to-Income Ratio
Lenders look at how much debt you have compared to your income (DTI ratio). Depreciation reduces your taxable income without touching your actual cash flow. So, even though your reported income is lower, you still have plenty of cash for your mortgage, making you look better to lenders.
Non-Cash Deduction Perks
Since depreciation is a non-cash expense, it doesn’t reduce your actual cash. Lenders often add back depreciation to your income when they’re figuring out how much you can borrow. This can really boost your qualifying income, especially if you have a lot of depreciation.

Using Tax Returns to Qualify

For self-employed folks, using your tax returns is usually the best way to qualify for a mortgage. Lenders like Fannie Mae and Freddie Mac require this method because it gives a clear picture of your financial health over a couple of years. Plus, if you’re aiming for a conventional mortgage, showing solid tax returns can help you qualify for better rates and terms.

What If You Don’t Qualify with Tax Returns?

No worries! If you don’t qualify using tax returns, there are other options. We can look at Non-Qualified Mortgages (Non-QM) which use alternative documentation like bank statements or 1099s. These loans can be a lifeline for self-employed borrowers who have irregular income or take significant deductions that reduce their taxable income.

Jumbo Loans

If you’re looking at high-value properties, you might need a jumbo loan. These loans are for amounts that exceed the limits set by Fannie Mae and Freddie Mac. While they come with stricter requirements, leveraging depreciation and presenting a strong financial profile can help you secure these larger loans.

A Quick Example

Imagine you’re a self-employed contractor with $100,000 worth of equipment. Instead of deducting that amount all at once, you spread it out over several years. If you depreciate $10,000 each year, that amount comes off your taxable income. Your taxes go down, but your cash flow stays strong, making you look like a solid borrower.

The Bottom Line

Depreciation can be a real game-changer when you’re self-employed and looking for a mortgage. By taking advantage of this non-cash expense, you can improve your financial picture and boost your chances of getting that loan.

If you’re self-employed and shopping for a home in North Carolina, South Carolina, or Florida, we’re here to help! Reach out to us for advice on how depreciation and other strategies can work for you.