Overcoming the Obstacles to Getting a Mortgage When You’re Self-Employed
Getting a home loan doesn’t have to be as arduous or as intimidating as many people expect. If you’re working with a loan officer who has your back, you’ll probably be pleasantly surprised at how painless the process can be. But if there is any group of people who do jump through a few extra hoops in order to get financing on a home, it’s entrepreneurs.
That’s because self-employment income looks different on paper and a lot of bank loan officers, and even some certified mortgage loan officers, don’t know how to properly assess ability to pay based on the type of financial reporting business owners are required to do.
It’s in the business owner’s best interests to show as little income as possible for tax purposes. So if you’re self-employed your accountant’s job, under normal circumstances, is to identify every legally-deductible expense and show that as a deduction from your business income. However, if you’re preparing to buy your dream home, it’s important that your ratio of income to other expenses show an ability to pay your new mortgage and that your finances indicate an upward trend to your bottom line.
That’s why you need to let your accountant in on your plans so that they can partner with you in making the loan process smooth and easy. They may advise you to be a little less aggressive about writing off expenses on your vehicle, on meals and entertainment, or phone and internet. They’ll look at areas where you’d personally pay those expenses anyway, but can legally deduct them from the business.
Your accountant may also be able to break your expenses down in more detail so that your loan officer can more easily adjust for line items that are one-time expenses or which are personal items that are shared by the business.
Your accountant may also traditionally make adjustments to your tax return that are appropriate under tax code, but which are not reflected on your financial statement. You’ll need to ask that your returns and financials be reconciled before presenting them to your loan officer.
Depending on your business structure you’ll also need to be sure that any corporate distributions are reflected in your earnings.
Most importantly, partner with a loan officer you trust and help them understand how you keep your financial records. You’ll need to be prepared to bring in two years of tax returns and financial statements (balance sheet and profit and loss). You want those records to show stability or upward trends in your bottom line as well as enough earnings to meet the required ratio of income to mortgage payment. Talking with your loan officer before you begin to gather that information will help you and your accountant put your financial reports in the most favorable light.
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We’re here if you need to close on your dream home fast (we are, after all, the “home of the 8 Day Close”) and we can help you get the right mortgage for you even when your credit isn’t great. Call your local office, or fill out our easy on-line form, to get one of our licensed loan officers working on the right financing to get you into the home of your dreams!
About Keith Vollmar, CPA, CFP®
For more than 10 years, Keith Vollmar has worked with the owners and staff of small and mid-sized businesses to identify and meet their long term business and financial goals and objectives.
His specialties include acting as an “outsource CFO” for businesses who do not need an internal Financial Manager; advising on key decisions regarding business plan projections, cash flow management, and growth plans. He and his team also provide a full range of Accounting and Tax Preparation.