Home Consumer debt The complete guide to obtaining a mortgage when you are self-employed | Business

The complete guide to obtaining a mortgage when you are self-employed | Business


It’s no surprise that if you’re self-employed and trying to get mortgage financing, you might have a harder time getting your loan approved. Not to mention closing your loan. If you are self-employed, here are several loan factors you should be aware of regarding being self-employed and showing income to qualify for funding.

When you are self-employed, you must have two years of federal tax filings to qualify. The lender will average the two-year returns of most loan programs. This means that you must have two years of proof of taxable income on paper after expenses. However, there are some caveats you should be aware of. One such caveat is that if you have declared self-employment in the past five years, only one year of the most recent tax return is needed to qualify. It goes without saying that tax returns must be filed and validated by the IRS. The mortgage company you work with will do what is called a tax validation. They will ask you to complete a 4506 form which will allow them to erase the tax returns you provided. They can sign tax transcripts and tax transcripts can only come from the specific processing of your tax returns through the IRS.

This is where things can sometimes get tricky. If you had a good year for example in 2020, then you had a bad year in 2021 and your next 2021 tax return will be relatively as good. Your taxes are not due until April 2022 and you can make an extension until October 2022. This will save you time to use the tax return for the year 2020 which, in this case, would be the previous year. However, for self-employment income to be taken into account, lenders will also ask for a year-to-date profit and loss statement. The year-to-date profit and loss statement is very important because it is a measure or indicator of your current year-to-date income. This income must be consistent with the most recent year’s tax return. If the income is equal or higher, you are in good shape. However, if your United Aid profit and loss statement is lower than the most recent year’s tax return, it will look like a drop in your income on paper. This is something you will need to be aware of as it comes to getting mortgage financing when you are self-employed.

So, let’s say that for tax purposes you filed a Schedule C, which is the most common type of sole proprietorship self-employment business as an individual. This is the easiest income to qualify, but it also has the highest tax exposure in terms of taxation directly proportional to the income you report on your net profit after deductions. If you were going to start a business and pay yourself a salary, it’s critical that you don’t bleed your business dry or make it negative from a balanced accounting standpoint to pay yourself a salary. The reason for this is if you are basically paying yourself a monthly salary or income from a business that has no real income to support that income. This means that you either avoid paying taxes or pay taxes at the expense of not being able to qualify for financing. Please note that you should always ensure that you seek the appropriate tax advice for your unique situation. However, it goes without saying, more than likely, the reality of it is to qualify for financing, it’s set to get you in the crosshairs with your accountant trying to help you get all your qualifying deductions. Just because you can take advantage of the allowed deductions doesn’t mean you should necessarily do so, as it will lower your income. When it comes to qualifying for mortgage income to offset a liability payment, that is, a mortgage payment is essential. So, the solutions you have are:

1. Pay the taxes associated with the income you report and don’t try to take unnecessary deductions to reduce your liability if you’re trying to buy or refinance a home.

2. Bring in another borrower. Maybe your spouse can sign the mortgage with you, or you can add a co-signer and refinance that co-signer in the future if that’s a possibility.

3. You may be able to look for a cheaper home that supports the income you are posting.

4. Can you pay off consumer debt like a car loan or a credit card.

Not all lenders see it this way, but make sure the lender takes into consideration any business expenses specifically paid for by your company that will help lower your debt-to-equity ratio. So that auto loan payment that’s on your credit report, well guess what, if it’s paid from a business bank account and is itemized on your Schedule C tax return , this debt does not become an obligation in relation to your debt ratio. because it is already taken into account in your monthly income.

The basics show the income you can with regards to qualifying for a mortgage or being prepared to have to use an alternative method such as a co-signer, paying off debt, or buying a more suitable home according to your economic means. It can also mean having a pragmatic discussion with a lender and working with them over time to give you a bigger, broader plan so you and your family can make a smart financial decision when you can afford it.

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes, vacation homes and investment properties. Learn more about www.sonomacountymortgages.com.