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Self-employed buyers sometimes have a frustrating experience with mortgages because they know how much money their business generates. And then underwriting appears to speak an entirely different language.
That's because:
- Revenue
- Profit
- Taxable income
- Cash flow
- Qualifying mortgage income
are not necessarily the same thing.
THE TAX DEDUCTION PROBLEM
Business owners appropriately work with tax professionals to claim legitimate business deductions.
Those deductions may reduce taxable income.
That can be wonderful at tax time.
Then a lender evaluates documented income for mortgage qualification.
Suddenly the buyer says:
“But I made far more than that!”
That may be true economically.
The lender still has to follow applicable underwriting guidelines.
This is why a self-employed buyer should talk with a lender well before shopping.
HOW LONG HAVE YOU BEEN SELF-EMPLOYED?
History can matter.
A lender may evaluate:
- Time in business
- Type of business
- Stability
- Prior related employment
- Current income pattern
Guidelines vary.
WHAT DOCUMENTS MAY BE NEEDED?
Depending on financing:
- Personal tax returns
- Business returns
- Profit-and-loss statements
- Balance sheets
- Bank statements
- Business licenses or organizational documentation
- Additional explanations
The actual checklist comes from the lender.
See Lisa's mortgage document checklist for the full picture.
WHAT ABOUT BANK-STATEMENT LOANS?
Some borrowers may explore nontraditional or alternative-documentation products when conventional income documentation does not fit their situation.
These loans can have different:
- Rates
- Down-payment requirements
- Reserves
- Underwriting
- Costs
Compare them carefully with a qualified lender.
BUSINESS OWNERS SHOULD PLAN AHEAD
If you expect to buy in 12 months, now can be an excellent time to have a conversation involving:
- Lender
- CPA
- Financial adviser where appropriate
You want your tax strategy and future mortgage goal understood before the tax return is filed. Not after.
LISA'S ROLE
Lisa helps make sure the house search matches the financing that actually works.
There is no point shopping at $900,000 because your business had $900,000 in revenue if the lender's qualifying calculation tells a different story.
Get the financing right.
Then go find the house.
