If you are self-employed and have ever applied for a mortgage, you know it can be extremely difficult to explain your income and provide all the required documents. From a mortgage perspective, the main difference between someone that is self-employed versus someone who is an employee is how income is determined.
Most self-employed people do not receive a W-2. As a result, lenders need to rely on tax returns to verify the income of the self-employed applicant. This is a challenge for lenders for a number of different reasons.
- Most people want to report the least amount of taxable income that is possible, which will result in the least amount of tax owed;
- Determining what adjustments are allowed to be added back to income for mortgage qualification purposes;
- Most mortgage companies (broker and underwriters) are not tax professionals and rarely completely understand the tax laws and how they impact an individual’s tax situation and income being reported; and
- Many people who are self-employed, have a complex tax situation that often includes multiple tax returns – a personal return and business returns such as Schedule C’s, partnership returns, and various types of corporate returns.
Often self-employed people struggle with qualifying for a mortgage because they do not report enough income to qualify for the mortgage even though all the other characteristics of their credit profile are perfect. Self-employed business owners often claim take tax write-offs, such as depreciation and automobile expenses. These amounts are deducted from their business income, even though they are noncash transaction. Personal expenses, such as car leases or travel and entertainment costs, are frequently covered by the business as well, so the net income reported on the tax return may not accurately reflect the true earnings of the business.
As a CPA who understands tax law, tax returns and mortgage underwriting guidelines, we can work with our self-employed clients and provide more help than most mortgage companies. Additionally, we can communicate and work directly with our client’s accountants, tax people, and financial advisors to streamline the process for our self-employed clients. If you are self-employed and need help getting your mortgage approved, contact us. We can help.