Mortgage Options for Self-Employed Homebuyers

Being self-employed can give you more control over how you earn your income. Unfortunately, it can also make getting a mortgage more complicated.

You can have a successful business, strong cash flow, excellent credit and substantial assets, yet still run into problems when applying for a traditional mortgage.

The reason is often simple: your tax returns don't always tell the full story of your financial strength.

Business owners and self-employed professionals commonly take legitimate deductions that reduce taxable income. That's good tax planning, but traditional mortgage underwriting often relies heavily on the income shown on those returns.

The good news is that a conventional mortgage isn't your only option.

Depending on your situation, bank statement loans, 1099 programs, asset-based financing and other alternative mortgage programs may provide a different way to qualify.

Why Can Getting a Mortgage Be Harder When You're Self-Employed?

For a traditional W-2 employee, calculating mortgage income can be relatively straightforward.

Self-employed income is different.

Maybe you own a business. Maybe you're an independent contractor. Maybe you're paid primarily through 1099 income. Your income may fluctuate throughout the year, and your tax returns may include legitimate business expenses and deductions that reduce your taxable income.

That can create an unusual situation:

You know what you're earning. Your bank account knows what you're earning. But your tax return may tell a different story.

Traditional underwriting guidelines don't always capture the entire financial picture.

That's when it's worth looking beyond a traditional mortgage.

Bank Statement Loans: Another Way to Look at Income

A bank statement mortgage can be particularly useful for self-employed borrowers whose tax returns don't accurately reflect the cash flow of their business.

Rather than qualifying primarily from the income shown on tax returns, certain programs may allow us to evaluate deposits using personal or business bank statements.

Depending on the program, we may review 12 to 24 months of bank statements to establish qualifying income.

This can potentially work well for business owners who generate substantial revenue but also have significant legitimate deductions.

Instead of asking only:

"What does your tax return say you earned?"

we may be able to ask:

"What does the cash flow of your business actually look like?"

That's an important distinction.

1099 Income Doesn't Have to Fit Into a W-2 Box

More people are earning income outside of a traditional salary.

Consultants, Realtors, contractors, sales professionals, medical professionals and other independent workers may receive some or all of their income through a 1099.

That doesn't automatically prevent you from getting a mortgage.

Certain 1099 mortgage programs may provide an alternative way to document income for qualified borrowers rather than forcing that income into the same underwriting framework used for a traditional salaried employee.

The right solution depends on how you're paid, how long you've been earning that income, your credit profile, assets and the property you're purchasing.

The important point is simple:

The way you're paid shouldn't automatically determine whether you're able to buy a home.

Your Assets May Be Part of the Answer

Sometimes a self-employed buyer's greatest financial strength isn't the income shown on a tax return.

It's what they've accumulated.

A business owner may have significant savings, investment accounts or retirement assets while showing relatively modest taxable income.

Depending on the mortgage program, an asset qualifier or asset-depletion loan may allow eligible assets to be considered when determining a borrower's ability to qualify.

This can be particularly useful for business owners, investors, retirees and other borrowers with significant assets but nontraditional income.

Rather than evaluating only one piece of the financial picture, we're able to look at the borrower more broadly.

Don't Change Your Tax Strategy Before You Know Your Mortgage Options

This is one of the most important conversations we have with self-employed clients.

A business owner may assume:

"If I want to buy a house next year, I need to show more income on my tax return."

Maybe.

But don't assume that before understanding your mortgage options.

Your accountant may have very good reasons for the way your business and taxes are structured. Changing that strategy solely to fit traditional mortgage underwriting could have consequences that extend well beyond the mortgage.

Before making those decisions, talk with your CPA or tax professional and have us look at the financing side.

If a traditional mortgage works, great.

If it doesn't, we can determine whether a bank statement loan, 1099 program, asset-based loan or another portfolio option provides a better fit.

You shouldn't change a sound financial strategy simply because you assume there's only one way to get a mortgage.

What If Another Lender Already Said You Don't Qualify?

This is where the distinction between "I don't qualify for a mortgage" and "I don't qualify for this particular mortgage" becomes important.

They aren't necessarily the same thing.

If your tax-return income doesn't support a conventional mortgage, the conversation doesn't automatically have to end there.

We can look at the situation from several different directions:

• Can we qualify using traditional income?

• Would a bank statement program better reflect the business's cash flow?

• Is there an appropriate 1099 program?

• Can eligible assets help with qualification?

• Is there another portfolio or alternative-documentation option worth considering?

We're not trying to force someone into a specialized loan if a traditional mortgage works.

We're trying to determine which mortgage makes the most sense for the way that person actually earns and manages their money.

Getting Fully Approved Matters Even More When You're Self-Employed

One of the biggest mistakes a self-employed buyer can make is waiting until they've found the house to figure all of this out.

A quick prequalification may not uncover the same questions that arise once an underwriter reviews tax returns, business income, bank statements and other documentation.

That's why we believe in doing as much work as possible upfront.

Our Full FastTrack Approval allows qualified buyers to go through underwriting before they're under agreement on a property.

For a self-employed buyer, that can be especially valuable.

It allows us to identify potential issues earlier, determine the appropriate financing strategy and give the buyer a much clearer understanding of their purchasing power before they start making offers.

It can also give the seller and listing agent greater confidence that the financing has been thoroughly reviewed.

When Should a Self-Employed Buyer Start the Mortgage Conversation?

Before you're ready to make an offer.

Ideally, we want to understand:

How you earn your income → how the business is structured → what your tax returns show → what your bank statements show → your available assets → credit and debts → down payment → property goals

Then we can compare the available options.

Sometimes the answer will be a traditional conventional mortgage.

Sometimes it will be a bank statement loan.

Sometimes a 1099 or asset-based program makes more sense.

And sometimes there may be multiple ways to structure the financing, giving you the ability to compare the costs and benefits before deciding.

Mortgage Options for Self-Employed Homebuyers in Massachusetts

We work with self-employed buyers throughout Massachusetts, Greater Boston and the North Shore, including Beverly, Salem, Peabody, Lynnfield, Marblehead, Wakefield and surrounding communities.

We've worked with business owners, independent contractors and professionals whose finances don't necessarily fit neatly into traditional mortgage underwriting.

The earlier we have the conversation, the more options we can explore.

If you're self-employed and thinking about buying a home, don't assume your tax return determines your buying power.

And if you've already been told you don't qualify, it may be worth getting another perspective.

You may not need to change the way you earn your money.

You may simply need a mortgage designed to understand it.

If you'd like to know what's possible, give me a call. I'm happy to look at the numbers and walk you through the options.

George Koutsos
Senior Vice President
The Koutsos Team | CrossCountry Mortgage
781-864-0889
george@teamgk.com
NMLS #29613

Loan programs are subject to borrower and property eligibility, underwriting requirements and program availability. Not all borrowers will qualify. Documentation, credit, down payment and reserve requirements vary by program.