Self-Employed and Buying a Home? Start Planning Before You Apply

One of the questions I hear frequently from business owners is:

“Is it harder to get a mortgage when I’m self-employed?”

Not necessarily.

Self-employed borrowers buy and refinance homes every day. The difference is that documenting income can require a little more analysis than it does for someone receiving a regular paycheck.

That is why I like to start the conversation early.

If you own a business and think you may purchase a home in the next year or two, understanding how your income will be viewed before you file your next tax return can put you in a much stronger position when you are ready to buy.

Your Tax Return and Your Mortgage Income Are Not Always the Same Number

When you are self-employed, lenders generally do not simply look at the amount of money coming into your business account and call that your income.

Depending on how your business is structured, we may need to review your personal tax returns, business returns, Schedule C, K-1s and other supporting documentation.

We are looking for income that can reasonably be considered stable and likely to continue.

Current Fannie Mae guidelines generally look for a two-year history of prior earnings for self-employed borrowers. There are circumstances where a shorter history may be considered, including certain borrowers with at least 12 months in their current business and prior experience in the same or a similar field. Selling Guide

Freddie Mac also generally requires a two-year history of self-employment in most situations, with documentation requirements varying based on how long the business has been established. Freddie Mac

Tax Write-Offs Can Affect Qualifying Income

Business deductions can reduce your taxable income, which is obviously one of the benefits of owning a business.

But those same deductions can also affect the income available for mortgage qualification.

That does not mean every deduction simply gets subtracted from your mortgage income. Certain expenses may receive different treatment when we analyze the tax returns.

The important point is that your taxable income, business cash flow and mortgage qualifying income can be three different numbers.

That is why I would rather review everything early than discover an issue after you have already found the house you want.

Two Years Is Important, But It Is Not an Absolute Rule

I still hear people say that you cannot get a mortgage unless you have been self-employed for two full years.

That is too broad.

Two years remains the standard history lenders generally want to see, but current conventional guidelines provide some flexibility depending on the borrower's circumstances, prior work history and documentation. Selling Guide

The right answer depends on the individual borrower.

Be Careful About Moving Money Out of the Business

Another issue that comes up with business owners is using business funds for a down payment or closing costs.

Having the money available does not automatically mean we should move it.

For example, under current Fannie Mae guidance, when business assets are being used for the transaction and self-employment income is also being used to qualify, the lender must evaluate whether removing those funds could negatively affect the business. Selling Guide

This is another area where planning ahead can help.

Before moving a large amount of money between accounts, talk with your mortgage professional first.

Talk to Your CPA, But Include Your Mortgage Professional Too

Your CPA's job is to help you make good tax decisions.

My job is to understand how those decisions may affect your mortgage options.

Those two objectives do not always line up perfectly.

I am not suggesting making tax decisions simply to qualify for a mortgage. I am suggesting that if purchasing a home is part of your plan, it makes sense for everyone to understand the plan before major decisions are made.

Sometimes a conversation before December 31 is much more valuable than one after the tax return has already been filed.

Start Before You Are Ready to Buy

If you are self-employed, you do not need to wait until you find a house to figure out what you qualify for.

We can review:

• How your business is structured
• Your recent personal and business tax returns
• Personal and Business Bank Statements up to 12-24 Months
• How your qualifying income is likely to be calculated
• Existing debts
• Available savings and reserves
• Down payment options
• Whether conventional, jumbo, bank statement or another loan program makes the most sense

Sometimes everything already looks great.

Other times we identify one or two things that would be helpful to work on before buying.

Either way, I would rather know early.

If buying a home is somewhere in your plans, start with the mortgage plan before you start looking for the house.