Being self-employed brings its share of benefits as well as headaches. Yet being self-employed and house-hunting can present problems and pitfalls unique to the self-employed borrower
Most self-employed individuals take advantage of the tax benefits available to them, utilizing accepted accounting practices to reduce their taxable income. While a CPA would view this favorably, this double-edged sword also reduces the qualifying income lenders calculate, and thus the amount a self-employed individual may borrow.
Years ago, there were No-Income Verification loans that catered to such borrowers. But such loan options no longer exist. Thus, if you’re self-employed and contemplating a home purchase or refinance, it’s critically important you take steps to avoid these Top Five Mistakes:
- Self-Employed for Less Than Two Years:
National underwriting guidelines require you to be self-employed for at least two years before your income can be utilized. Whether yours is a corporation, a partnership, or your income is reflected on a Schedule C, unless you can document you’ve received income in this manner for a minimum of two years, it’s highly unlikely this income will be used to qualify for a mortgage.
- Not Showing All of Your Income On Your Tax Returns:
Some business owners (such as those in cash businesses) don’t necessarily show all of their income. Many business owners maximize their expenses in order to reduce their tax burden. And yet others write off so much that they show a loss (negative income) on their tax returns. Lenders will review your most recent two years’ filed taxes and average them to calculate qualifying income. Therefore, you must start thinking two years in advance about how your tax filings will ultimately affect your ability to obtain a mortgage.
- No Ability to Produce Independent, Third-Party Verification of the Business:
National underwriting guidelines require self-employed borrowers verify via an independent third-party, the legitimacy of the business and thus the source of this income. This can often be documented via a business license from their state agency, a detailed letter from the business’ CPA, and sometimes even copies of newspaper, magazine, or online advertisements verifying the business name, address, and phone number. If the legitimate existence of your business and from where you receive revenue cannot be documented, an underwriter may not utilize this source of income to qualify.
- Using Business Funds From a Business Account Towards Your Mortgage Transaction:
If you’re planning to use any business funds towards your transaction, the lender will require you to source all large deposits going into your business account over the past two bank statement periods. In addition, regardless of your opinion or that of your CPA, the mortgage lender is now required to analyze the cash-flow of your business to determine whether the use of these funds will have an adverse impact on your business! Believe me; this adds to your transaction a level of complexity you should wish to avoid.
- Not Planning Months Ahead By Working With a Competent Mortgage Professional:
Unfortunately, most borrowers think about their mortgage financing only after they’ve found a new house to buy. By then, it’s often too late and their mortgage is destined for a denial.
The good news is that most of these pitfalls can be avoided – if you plan months ahead of time.
By working with a competent, qualified, and Certified Mortgage Planning Specialist® like myself, my office can provide guidance today, while you have the luxury of time. We can position you to qualify for a mortgage, while still taking advantage of your tax benefits. And we can ensure your mortgage complements your financial needs today, while helping you attain your financial goals tomorrow. You’ll receive accurate information, valuable advice, and a concierge experience. Your transaction will go smoothly. And your loan will close.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.