a self-employed mother sits at a table with her child while talking on the phone with a mortgage lender about a home loan Applying For a Home Loan as a Self-Employed Business Owner

    There was a time when lenders would accept whatever income you put on your application as accurate and true. These were called “stated income” loans; for many obvious reasons, they no longer exist. There were also loan programs where the lender would accept a record of your bank deposits as documentation of income. These “bank statement” mortgage loan 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 as far as standard, government-insured mortgages go (we can still offer bank statement loans as non-qualified mortgages).

    Now, mortgage lenders put all applications under a microscope before approving them. Getting a mortgage when you own your own business requires you to know just what the lender wants to see before you apply.

    Here are 6 things you need to know about the process when you apply for a home loan while self-employed.

    1. You’ll need to provide your tax return and Form 1084

    If your most recent federal tax return shows that you have been self-employed for at least 12 months, you may only need to supply your most recent 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. Self-employed borrowers applying for a home loan can use this form to maximize net income for qualifying purposes.

    So, what do I do when I want to buy a house? The lender looks at your NET income (the money left over after 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. However, you aren’t legally required to claim every deduction, and every deduction is an expense that lowers your NET income.

    Remember your lender doesn’t care how much cash your business took in; it cares how much you had after the bills were paid. The goal is to show the maximum amount of NET income to qualify for your loan.

    2. You can show more net income.

    Limiting your tax deductions isn’t the only way to boost your NET income. Certain business expenses can be added back to your net profit. You may claim depreciation on business equipment and hardware. Depreciation is a tax-deductible accounting loss that shows the decreasing value of an asset as it gets older. This deduction gets added back into your net profit. Mortgage lenders also add back depletion, amortization, one-time expenses, and a portion of business miles claimed.

    3. You can prove that some costs were one-time expenses.

    You may have had certain one-time expenses for 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. Always be prepared to provide documentation that they were one-time expenses.

    4. 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 can add that amount back into your net profit, as well.

    5. You have the option of paying more in taxes to qualify for your loan.

    Remember, you are not required to claim every deduction allowable under the IRS tax code. You may decide not to claim every deduction the IRS permits. For example, in 2020, business miles are tax-deductible at 57.5 cents per mile. 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.

    6. You may be able to exclude your car payment.

    Are you making payments for your vehicle through your business account? If you have an automobile loan or lease in your own name, and you make regular payments from your business account, you may be able to exclude those monthly payments from your personal statement. Just be sure to remember, they need to show up on your business account.

    Questions? Ask JVM Lending

    If you are considering a future home purchase and are self-employed, contact our team! JVM Lending’s Mortgage Analysts are available 7 days a week by phone at 855-855-4491 or by email at [email protected] to help answer any questions or alleviate any concerns you might have about a home loan and the homebuying process as a self-employed business owner.

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    Please Note: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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