Getting a Mortgage When You're Self-Employed
If you are self-employed, getting a mortgage is not harder because lenders think you are risky — it is harder because proving your income is more complex. Understanding what lenders need helps you prepare.
Documentation Requirements
Lenders typically require 2 years of personal and business tax returns, a year-to-date profit and loss statement, 2-3 months of bank statements (personal and business), and a CPA letter or business license. Some lenders also want a 4506-C form to verify your tax returns directly with the IRS.
The Income Calculation Problem
Here is where it gets tricky: lenders use your adjusted gross income from tax returns, not your gross revenue. If you earned $150,000 but wrote off $80,000 in deductions, your qualifying income is $70,000. This is the central tension for self-employed borrowers — the deductions that save you on taxes reduce your qualifying income for a mortgage. Talk to your CPA and your loan officer together before filing taxes in a year you plan to buy.
Alternative Documentation Loans
Bank statement loans allow self-employed borrowers to qualify using 12-24 months of bank deposits instead of tax returns. These fall outside standard lending guidelines, so they typically come with higher interest rates. They can be a viable path if your tax returns understate your actual earning power. Asset depletion loans are another option if you have significant savings.
Key Takeaways
- ✓Lenders use your tax return income, not your gross revenue
- ✓Tax deductions that help you on April 15 reduce your qualifying income
- ✓Coordinate with your CPA and lender in the year before you plan to buy
- ✓Bank statement loans are an option but typically come with higher rates
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