Refinancing a mortgage is a golden opportunity to lock in today's low interest rate for the next 15 or 30 years. While interest rates now are still low, there's a good chance they will be heading up in the coming months.
There’s a lot to like about having your own business. You don’t report to The Man, you can set your own hours, and you get to take advantage of some attractive tax write-offs. It’s the sweet life, right?
If you’re self-employed, you know that a lot of this is fantasy: you probably work longer hours than you would if you had a “regular job,” and instead of just one boss, you have many—your customers and clients.
But there are those sweet, sweet tax write-offs: entertainment, travel, business mileage and more. A good accountant can save you thousands in taxes by understanding how many ways you can claim business expenses. If you are a sole proprietor (as most self-employed people are), you file Schedule C along with your tax return. This is the Profit or Loss from Business form. Here, you get to claim every legitimate business expense you can think of for the tax year—and it can reduce your tax bill dramatically.
But what about when you want to get a mortgage? The lender looks at the NET income—the money left over after all your expenses—and uses that number to decide whether to approve your loan. If you and your accountant were especially aggressive in claiming expenses, your income may fall short of what you need to get your loan.
There was a time when lenders would accept whatever income you put on your application as being true. These were “stated income” loans and no longer exist. There were loan programs where the lender would accept your bank deposits as documentation for your income. These “bank statement” programs disregarded business expenses, so applicants could document more income to qualify for bigger mortgages. These, too, have gone the way of the dodo bird and brachiosaurus.
Now, lenders put all applications under a microscope before approving them. Getting a mortgage when you own your own business requires that you know what they are looking for before you apply.
Here are six things you need to know about the process when you apply for a mortgage loan while self-employed.
You’ll need to provide your tax return and Form 1084
If your most recent tax return shows that you have been self employed for at least 12 months, you may have to supply just your most recent Federal return. This could be important if your business has been growing, and the most recent tax return is significantly better than the previous year. Your lender will also prepare form 1084—the Cash Flow Analysis form. This is where you can maximize your net income for qualifying purposes.
The lender starts with the net income you reported on Schedule C. This is your gross sales minus all the write-offs: normal operating expenses, mileage, entertainment, depreciation, etc. A clever accountant will get your business expenses as high as legally possible to minimize your tax liability.
You can show more net income
There are certain expenses that you can add back to your net profit. You may claim depreciation on business equipment and hardware. Depreciation is an accounting loss that allows you to write off the decreasing value of an asset as it gets older. You can add that back to your net profit.
You can prove that some costs were one-time expenses
You may have had certain one-time expenses in your business. They reduce your net profit for tax purposes, but if you can document that they won’t occur in the future, you’ll be able to add those nonrecurring expenses back into your net profit. Be prepared to document that they were one-time expenses.
There’s also a home office deduction
If you use any part of your home to conduct business, you can claim a home office deduction. You will be able to add that amount back into your net profit, as well.
Remember: the lender doesn’t care how much cash your business took in; it cares how much you kept as net profit. Your goal is to be able to show the maximum amount of net income to qualify for your loan.
You have the option of paying more in taxes to qualify for your loan
One other possibility: if you have not yet filed your tax return before applying for your loan, you may decide not to claim every deduction the IRS permits. For 2016, you can write off business miles at $.54 each. That can add up to a large number—and a lower net profit for qualifying purposes. Consider whether paying a bit more in taxes to qualify for your loan is a good trade-off, and perhaps claim less business mileage.
You may be able to exclude your car payment
If you have an automobile loan or lease in your own name, and if you make the payments from your business account, you may be able to exclude those monthly payments from your personal statement, so long as they show up on your business account.
Opportunity doesn’t wait for you
Now you, as a brave entrepreneur, know how to apply for a mortgage loan and qualify just as though you worked for The Man. You’ll need to use these tips to take advantage of low rates and the homes that are available. After all, you shouldn’t have to put off refinances or purchases on the basis that you’re seeking the mortgage when self-employed.