Self-Employed? Your Tax Return Isn't the Whole Story

By George Koutsos

One of the more frustrating conversations I have with self-employed buyers usually starts like this:

“George, I make good money. Why am I having trouble qualifying for a mortgage?”

And I understand the frustration.

You own a successful business. Revenue is strong. There's money coming in every month. Your credit is good. You have money in the bank.

Then you apply for a mortgage and discover that the income a lender can use may look very different from the income you feel you're actually earning.

That's because traditional mortgage underwriting wasn't necessarily designed around the way business owners manage their finances.

The good news is that a traditional tax-return mortgage isn't the only way to look at a self-employed borrower anymore.

The Same Tax Strategy That Helps Your Business Can Hurt Your Mortgage Application

Most self-employed people don't sit down with their accountant every year and say:

“I'd like to pay more taxes.”

You take legitimate business deductions. You deduct expenses. You depreciate assets. Your accountant helps structure things efficiently.

That's normal.

The problem comes when you're applying for a traditional mortgage.

The lender generally isn't starting with your gross business revenue and saying, “That's what you make.”

They're looking at qualifying income under the requirements of the particular loan program. Depending on the business structure and tax returns, deductions and expenses can significantly affect the income available for mortgage qualification.

So you can have a business producing substantial revenue and still have a tax return that doesn't show enough qualifying income for the mortgage you want.

That's when people get confused.

“But I can afford the house.”

You may be right.

The issue isn't always whether you have money coming in.

Sometimes it's how the mortgage program is required to document it.

That's Where Alternative Documentation Can Help

There are mortgage programs designed specifically for situations where traditional tax-return underwriting doesn't tell the complete financial story.

One of the more useful options for certain self-employed borrowers is a bank statement loan.

Instead of relying exclusively on traditional tax-return income calculations, qualifying income may be determined using deposits reflected in personal or business bank statements, subject to the particular program's rules and expense calculations.

For the right borrower, that can make a significant difference.

Let's say someone owns a business generating consistent deposits every month.

Their tax returns reflect substantial legitimate business deductions, so their traditional qualifying income comes in lower than expected.

A bank statement program may give us another way to evaluate the cash flow.

Same person.

Same business.

Same house.

We're simply using a different method to document the borrower's ability to repay.

Bank Statements Aren't the Only Alternative

This is something I wish more self-employed buyers knew before assuming they can't qualify.

Depending on the borrower and the loan program, there may be several ways to approach the financing.

Bank statements are one.

For borrowers with significant investments or liquid assets, an asset-based or asset-depletion program may be worth exploring.

For someone purchasing an investment property, a DSCR loan may focus primarily on the property's rental income and expenses rather than qualifying the borrower in the same manner as a traditional owner-occupied mortgage.

There are also programs designed around 1099 income and other nontraditional income situations.

These aren't shortcuts around qualifying for a mortgage.

They're different underwriting methods designed for borrowers whose financial lives don't fit neatly into the traditional W-2 box.

And plenty of successful people don't fit neatly into that box.

This Is Where Planning Ahead Really Matters

If you're self-employed and thinking about buying a home, don't wait until you've found the house to figure this out.

That's probably the biggest advice I'd give you.

I've seen business owners get very excited about a property, make an offer and only then discover that their tax returns don't support the financing the way they expected.

That's a stressful time to learn how self-employed income is calculated.

I'd rather have that conversation early.

Let's look at the tax returns.

Let's look at the business.

Let's look at the bank statements.

Let's understand the assets.

Then we can determine what the traditional numbers look like and whether an alternative program should even be part of the conversation.

You may find out that conventional financing works perfectly well.

Or we may find another approach that makes more sense.

Either way, now you know before you're standing in someone's kitchen deciding whether to make an offer.

Realtors Should Ask One More Question

This matters for Realtors too.

When a buyer says they're self-employed, I'd ask:

“Has your lender actually reviewed how your income will be documented?”

There's a big difference between someone getting a quick prequalification based on what they say they earn and having someone actually review the documentation.

A buyer can have excellent credit, significant assets and a successful business and still run into an income calculation they weren't expecting.

That's not a buyer you necessarily need to lose.

It may simply be a buyer whose financing needs to be structured differently.

The earlier we know that, the more options we have.

Self-Employed Doesn't Mean Harder. It Means Different.

I've worked with business owners for a long time.

They're entrepreneurs, contractors, consultants, attorneys, physicians, restaurant owners, real estate professionals and people running businesses of every size.

Their finances aren't always simple.

But complicated doesn't mean unfinanceable.

Sometimes we just need to look beyond the first box.

If you're self-employed and you've been told you don't show enough income, or you're planning to buy and aren't sure how your income will be calculated, don't assume the answer based on your tax return alone.

There may be another way to structure it.

Send me the scenario and let's look at the whole picture.

George Koutsos
The Koutsos Team | CrossCountry Mortgage
781-864-0889
george@teamgk.com

Loan programs, income calculations, documentation requirements, rates, down payments and eligibility vary by borrower and program. All loans are subject to underwriting approval and applicable guidelines.