Self-Employed? How To Get a Mortgage

June 27, 2016

Being your own boss can come with a host of perks such as setting your own dress code (read: pajamas), a flexible schedule and a cubicle-less existence. But one financial benefit -- tax write-offs -- morphs into an ugly disadvantage when self-employed workers try to get a mortgage. It's not impossible to get a mortgage when self-employed, but it definitely requires advanced planning or stepping outside of conventional financing.

Lending standards are tough

There are almost 9 million self-employed people in the United States, representing about 6 percent of the non-agricultural workers, according to the U.S. Bureau of Labor Statistics. Many of these people earn a good living but find it hard to qualify for home loans. Borrowers typically have to provide two years' worth of tax returns, which often don't accurately reflect the take-home pay of self-employed people.


"How we qualify self-employed doesn't always agree with how the IRS says you can run your business legally," says Pava Leyrer, training and development manager at Northern Mortgage Services in Grand Rapids, Michigan. "So they are finding it harder to get a loan unless they want to show more income to the IRS. It's a fine balance."

Returns don't reflect true income


Self-employed people can take advantage of a slew of tax deductions related to their businesses, from retirement plans to business meals and entertainment to interest on business loans or business credit card interest. It reduces their taxable income, so Uncle Sam doesn't empty their pockets at tax time.


But when mortgage underwriters look at tax returns for proof of income, they see income after business expenses have been deducted. The result often is a much lower figure than what the self-employed person actually takes home. This could reduce the loan amount that the borrower can qualify for, or even result in rejection.

"If they are making money and the tax returns don't show it, I can't help them," saysJohn Stearns, a senior mortgage banker at American Fidelity Mortgage in Wisconsin.

Some lenders understand


In some cases, mortgage lenders will allow certain deductions to be added back to the income such as depletion, depreciation or a large, nonrecurring item, Leyrer says.

"I had a customer who owned a restaurant with a liquor license. He wrote off $90,000 for a one-time expense for the license," she says.

Plan ahead before borrowing


If you're self-employed, Leyrer recommends that you prepare longer than most borrowers before buying a home. The easiest way is to write off fewer expenses in the two years leading up to the big purchase. Clean up your finances so that your business doesn't commingle with your personal funds. For example, pay for a computer using a business credit card rather than a personal one, because some lenders may not count that debt against you because it belongs to the business, she says. 

Show year-over-year increases

Also, choose your years carefully. While lenders will ignore seasonal spikes and valleys in income by averaging out income over 24 months, they won't like seeing a decline in income from one year to the next.


"By definition, these businesses can be highly volatile," Stearns says, "so if one year shows income and the next year shows half as much, that could be a problem. You want to show an increase from year to year to show that business is good."


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