Here’s the good, the bad and the ugly about how being self-employed affects mortgage loan applications.
I am going to share some knowledge with you that most loan officers either can’t seem to wrap their heads ahead around, or don’t know. I know this to be a fact since we have funded countless loans that were previously denied by financial institutions/representatives that were not aware of some, or all of, the below.
#1: Length of Self-Employment Does NOT Need to Be 2 years – This is an OVERLAY
You will often hear that you need to be self-employed for two years in order to qualify for a mortgage loan. Makes sense, right? I mean anyone can have one good year, but what about two?
Here’s the deal: It is possible to get a mortgage after only one year of self-employment, in some cases.
For example, if you were a chiropractor for a firm and then branched off to become a self-employed chiropractor, then you would fit the bill for being approved with only one year of self-employment income.
#2: My tax returns show I made only $X,XXX
We often find that people rarely brag about how much money they make based off of their tax returns.
Working with a mortgage professional who thoroughly understands self-employed tax returns can mean the difference in your approval status.
You see, since we are familiar with accounting methods, we can distinguish the difference between an “accounting loss” and an actual cash flow “loss.” Here is an example: If your business owns an asset, you are allowed to “depreciate the asset” as a loss on your tax returns. This will show as an expense, reducing your profit or income for a given year. Since that expense was not a real expense, we will add that figure to your bottom line. This will increase the amount of money you can borrow to finance a home.
Business Mileage, Depreciation, Advanced Depreciation, etc., can all work in the same fashion. We are in-depth with these matters. In fact, we have built a calculator that the rest of the industry hasn’t even been able to develop. It fine tunes these figures for our self-employed clients.
Everything is not roses, though. Some expenses such as “Meals and Entertainment” can bite you. Since these only allow for a 50% deduction of the actual expense, we have to go back in and hit you again for the deductible amount (50% + 50% = 100% of actual hard expense).
#3: Car Payments got you down?
Another tip that can benefit self-employed borrowers is to ensure that you are paying for any personally financed business expense through your company account. This happens all the time.
Let’s say a business owner has a $500 car payment that appears on his personal credit report. The bank denied him because his “debt-to-income ratio” was too high. We ask the business owner to provide 12 months of cleared checks from the business account that shows the company pays for this expense. With these, we can “omit” the payment (like it is not there) from his personal liabilities since (1) the company pays for it, and (2) the company already accounts for these expenses in the corporate profits (lower as a result, so no need to hit them twice for the same expense).
While there is a plethora of aspects to a self-employed borrower’s loan file, I chose only to touch on a few (hey, everyone has to keep some secrets, ya know J). So if you want the absolute best deal on your mortgage and don’t want to spend your valuable time educating a new loan officer on various accounting methods, and how K-1s work, etc., then reach out to the experts at The Florida Mortgage Firm.
I guarantee you will not regret it.
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