Qualified Home Loans

Self-employed? How Last Year’s Tax Filing Affects Qualifying

It’s no secret that one of the most critical factors in getting qualified for a mortgage loan is documentable income. Lenders, both large and small, justifiably want to know that you have money rolling in consistently, as this is a good sign that you’re able to repay the borrowed money. Traditional home buyers can prove this by providing a W2 from their employer indicating just how much money they make week-to-week or month-to-month. However, things get a little trickier when we start talking about mortgages for self-employed individuals. Here’s why…

Self-Employed Borrowers: Challenges

Unlike traditional buyers, self-employed home buyers can’t produce a W2 to prove their income. Instead, lenders evaluate the last year of filed business and personal taxes to measure income. Despite having plenty of cash flow and access to credit through their business accounts, self-employed individuals are often shocked when they learn how much their net income is after factoring in tax write-offs and other business expenses. For example, a self-employed electrician may make $200k in gross sales, but if they write off $190k, $10k is left in taxable income. Their gross revenue is much different from their net income. 

There is no gray area, and no other documentation matters. Only what you report on the tax filing is considered. Any income earned after the last filing is irrelevant until you file the next taxes. Each set of tax returns will supersede and overwrite the prior year’s taxes. This can be a significant obstacle to those walking into their bank to qualify. However, because the formula is so black and white and transparent, it allows us to know and plan well in advance. 

Self-Employed Borrowers: The Opportunity 
Planning for 2022 tax filing represents a unique opportunity: a clean slate. 

Depending on your circumstances, we may be allowed to use your 2022 taxes and completely ignore your 2021 tax returns. Lenders would ignore carryover losses from 2021, and your 2021 taxes are not even provided to the lender. When you file your 2022 taxes, that income is “locked in” until you file your 2023 tax return. Given tax extension windows, your 2022 tax filing will dictate your ability to qualify up to the next 16-18 months (2023 tax due date + 6 mos extension). This works for conventional and jumbo loans, owner-occupied, second homes, investment properties, purchases, refinances, and cash-out loans.

You are in the driver’s seat. Planning to use your 2022 taxes to qualify for the loan you want is vital. Not every loan and situation allows us to use only 2022 taxes. Starting to gather your information and solutions now is especially critical for purchasing. While it may be true that as a self-employed borrower means more work for you upfront, we are fully equipped to help you succeed. We work with self-employed home buyers all the time to help them qualify for a mortgage loan that works.

Contact us today, and we can review your 2020/2021 taxes and help you plan.