Self-Employed Mortgage: What Lenders Actually Do With Your Tax Return

I own a photography studio, an insurance agency and a software company. I have had a lender look at my Schedule C like it was written in another language. That is why I do this part of the work. Self-employed income is not a problem. It is a translation job.

Here is what a lender actually does with your tax return, from a mortgage broker in Oregon City who has been on both sides of the desk.

The two year rule, and the exceptions

Most programs want two years of self-employment history, shown on two years of tax returns. Some will work with one year if you were doing the same kind of work as an employee before. If you have been self-employed less than a year, the honest answer is usually to wait, and I will tell you what to do in the meantime.

What the lender reads

For a sole proprietor, the lender reads the Schedule C. For an S corporation or partnership, they read the business return and the K-1. For every type, they are looking for the same thing: how much money did the business actually make available to you, and is it stable or rising?

They do not start from your gross sales. They start from your net profit, after deductions. That is the part that surprises people. The deductions that shrink your tax bill shrink the income a lender can use.

What gets added back

Not every deduction counts against you. Some are paper expenses the lender adds back to your income because no cash actually left the business.

• Depreciation. The biggest one for most business owners.
• Depletion, if you have it.
• Business use of home, in some cases.
• Certain one-time expenses, if you can document that they will not recur.

Mileage is a mixed case. Part of the standard mileage deduction is treated as depreciation and can be added back. The rest is treated as a real cost.

What does not get added back

Meals, travel, supplies, contract labor, advertising, software, rent, insurance. If cash left the business, it is a real expense, and the lender treats it as one. The year you decided to write off the new truck, the new camera body, and the trade show in Las Vegas is the year your qualifying income went down.

Declining income is its own problem

If this year's net is lower than last year's, the lender will usually use the lower number and ask why. If the drop is large, some programs will not use the income at all. A good year followed by a weak year reads as risk. A weak year followed by a good year reads as growth. Timing matters.

The bank statement question

You may have heard of programs that qualify self-employed borrowers on bank statements instead of tax returns. They exist. Whether I can offer one depends on what is available through Freestone at the time you apply, and the terms are different from a standard loan. I will tell you honestly whether it is an option for you and whether it is a better one.

How I work with your CPA

The smoothest closings I do for business owners start with a three way conversation, you, your CPA and me, a year before you want to buy. Your CPA's job is to minimize your tax. My job is to get you a house. Those goals fight each other, and the only fix is planning both at once. We decide together which deductions matter more than the mortgage and which can wait a year.

What to send me

Your last two years of personal and business tax returns, including all schedules and K-1s. Year to date profit and loss. Recent business and personal bank statements. That is enough for me to tell you where you stand.

I serve Oregon City, Clackamas County, Multnomah County, Washington County and the rest of Oregon. If you have been told no because you own a business, send me your returns and let me look before you believe it.

Becky Chambers, Mortgage Broker, NMLS #2814018. Freestone Mortgage, NMLS #2613454. Licensed in Oregon. Equal Housing Opportunity. For informational purposes only. This is not a commitment to lend. Program availability varies. Verify tax questions with a licensed tax advisor.