For self-employed borrowers, tax time usually means writing off as much income as possible through deductions & expenses in order to minimize any payout to the IRS. What you may not realize is that by writing off all your income, you’re taking away from the actual qualifying income that a bank will need to see when they review tax returns to qualify for a mortgage. If you have a thought about buying a home in the next 12 – 24 months, it’s very important to take the appropriate steps to make sure your net income as a self-employed contractor is showing as much income as possible, even if you have to pay more in taxes to the IRS. It’s definitely a catch-22 to show more income and pay more in taxes to be able to take advantage of the more traditional financing programs out there, but it is a step you must be willing to take as an independent contractor. Please consult your CPA to make sure that it is the right course of action for your personal situation. A CPA will be able to map out the pros & cons in showing more income or withholding more income from a tax standpoint.
If you are not willing to write off less for 2018 or it doesn’t make sense for your personal situation, then there is not a need to fret. There are still loan programs out there that are expanding upon the need for self-employed buyers to get into the buying market. These types of loans are referred to as bank statement loans, where the bank will utilize a deposit history of your income thru personal or business bank statements in lieu of showing your tax returns to qualify. The trade-off here is that those interest rates will be higher than traditional financing loans that utilize your tax returns because this type of niche financing. There is a much smaller pool of banks that will do this type of financing and little resale of these between banks, so the interest rates reflect this accordingly. So, if this isn’t something you want to do when making your first purchase, it makes sense to plan ahead. Talk to your CPA and start the 2 year plan of showing as much income as you can, within your means, and put yourself on the trajectory towards home ownership. Secondly, talk to your lender to have the lender analyze any proposed income that you may think of filing to make sure the income analysis is going to help put you on the trajectory towards making the home purchase that you desire.
Michael Abram / Sr. Loan Advisor
NMLS # 235060