While being self-employed can make the underwriting process of getting a mortgage more difficult, it by no means makes it impossible and with these tips, you can make it that much easier for yourself. Do keep in mind, while these tips may help you qualify for a mortgage, they are not meant to be taken as tax advice.
First off, if you are self-employed, you will need at least 2 years of work history and 2 years of filed tax returns. Mortgage lenders typically take a 24 month average of your self-employed income to determine if you qualify for your proposed mortgage. There are some exceptions to this. For example, if you have been self-employed for at least 5 years, underwriting may just use a your most recent filed tax returns to calculate your qualifying income.
Another common difficulty that self-employed borrowers face is that they have business credit cards that show up on their personal credit report which then affects their debt-to-income ratio. While there is not much that can be done to keep these off your personal credit report, you can take extra care to make sure you pay business debts with business funds and personal debts with personal funds. If you can provide proof that you have made payments on the debt from a business bank account for the past 12 months, mortgage lenders may remove that debt from your debt-to-income calculation, which is a key ratio for determining if you qualify.
Something that is not common knowledge for business owners is that one time purchases by your business can be added back into your qualifying income calculation. For example, let’s say your business buys a new manufacturing machine. With proper documentation to show proof of purchase and that it was a one time expense, this can be added back to your qualifying income. This gives you the opportunity to itemize the expense on your business returns with minimal impact to your qualifying income.
Depreciation is your friend! Depreciation expenses can be added back to your qualifying income as long as you report it on your tax returns. This can make a substantial difference in your qualifying income and ultimately the size of the mortgage that you qualify for.
Meals and Entertainment Expenses can hurt you! Unlike depreciation, meals and entertainment expenses are actually subtracted from your qualifying income. Keep this in mind when you go thru the tax filing process.
In addition to what is discussed here, there are other factors that need to be taken into consideration when it comes to qualifying for a mortgage. For further questions, please feel free to reach out to us at (760) 930-0569.