Talk to a lot of homebuyers that are apprehensive to apply for a home loan because they’re self-employed. This should deter you from getting a home loan or at least figuring out your options and planning ahead. Self-employed can come with a lot of financial benefits, including the ability to write off many expenses. However, this can be a disadvantage when you try to get a mortgage. Lenders look at your net income versus your gross income. If you’re self-employed and have found it difficult to qualify for a home loan in the past, there may be some things you can do now to prepare yourself for the future. Most lenders require two years of tax returns but even those may not accurately reflect the take-home pay. Schedule sees, business expenses, rentals and other unique tax deductions or credits can greatly affect your ability to get a loan or for a better interest rate.
Lenders qualifying income for self-employed borrowers is not always reflective of their income that is shown on tax returns. Not that you may be doing anything wrong, but with so many details, it can greatly affect what lenders are actually looking for.
Self-employed people can take advantage of many tax deductions that are related to their business. Depending on whether the business is so proprietorship, LLC or corporation, can affect how much the individual is actually receiving from the business. CPAs work to reduce taxable income so the government doesn’t take too much at tax time, but this can be a disadvantage when it comes to getting a home loan.
Mortgage underwriters and lenders look at tax returns because of the proof of income but after business expenses have been deducted that in him may be different. This can either result in higher interest rates, not so favorable terms or even rejection altogether. It’s important to talk to your CPA about the best way to present your tax returns to potential lenders and of course, you won’t want to co-mingle business funds with your personal funds.
In many cases, self-employed people may not show accurate tax returns as indicative of the actual earnings. It’s important to talk to a qualified lender or mortgage officer that is well-versed in helping self-employed individuals or families obtain the proper loan for their needs and for their budget.
It’s not impossible but it does take a little bit of planning. Talk to your tax accountant now if you plan on buying within the next six months. Being that it’s tax time right now, this might be an ideal place to start to prepare yourself for the next move in homeownership.