It’s an age-old question that gets validated every now and then by stories of one self-employed struggling to get a mortgage. Let’s look at the common barriers to mortgage financing for self-employed borrowers and how they can get past each hurdle.
Are you self-employed? Define self-employed.
Sometimes, the cause of the problem lies with not knowing your true status. And the key to that lies with the IRS.
Are you engaged in a business as a sole proprietor or an independent contractor? Are you a member of a partnership that is engaged in business? Or are you in a business, e.g. part-time business, for yourself? Most likely, you are self-employed per the IRS standards.
And this self-employment status should reflect in the kind of taxes you are obligated to pay. There are two:
- An income tax return filed annually
- An estimated tax paid quarterly
Are you deducting business expenses?
Being self-employed in the eyes of the IRS, you may claim for deductions on expenses incurred in your line of business. Still, deductions from business expenses and other write-offs can reduce taxable income and lead to tax savings.
Therein lies another hurdle. The income you have in mind is different from the final taxable income calculated by the IRS. To the lender, you appear to be making less compared to what you are actually earning before tax.
With a lower income on paper, your debt-to-income could be also affected. The debt-to-income ratio’s purpose is to determine whether you can comfortably take on the new mortgage debt. There are two ways to calculate the DTI with the front-end ratio, i.e. total housing costs relative to the gross monthly income is used for mortgages.
Are you talking with an expert?
When coming up with a tax plan to maximize your deductions, factor in the possibility of getting financing so as not be hurt by tax write-offs. It’s high time that you work with a CPA on the best tax approach.
Your CPA can also certify that you are indeed self-employed, which you can show to the lender as further proof of your status.
Lenders operate based on their guidelines for a specific mortgage product. While your status as a self-employed may prove to be extra challenging than the others, it doesn’t mean you’ll be rejected outright. Plan ahead and choose the mortgage loan that fits your need for a home.