Your income (among other things, such as your credit score and debts) is very important when it comes to qualifying for a mortgage. When you are self-employed, you make money, but you also spend money in your business, so your real income depends on how much money you have left after your business expenses. So, if you make $100,000 per year, but you have $40,000 in business expenses, then your net income is $60,000 per year. This is the number that a lender will typically take into account when qualifying you for a mortgage. They will ask for your two most recent tax declarations, business and personal, or just personal if you file a Schedule "C" and look for the NET (after expenses) instead of the GROSS to determine how much you can borrow given your existing debt like car loans, student loans, credit card balances, etc. Keep in mind that, typically, the lender will determine your income as the average of the last two years, so even if you had twice as higher income on last year's tax return, you will still be affected by the year before the last.
What happens when you include every single allowable business expense on your tax declaration? You reduce your income. You pay less income tax, but you also declare less income on your tax return and your tax return is what the lender will use as proof of your income. So, do not shoot yourself in the foot by declaring too much in business expenses if you are self-employed and planning to buy a house.
What if your bank statements can show you make more than what is on your tax return? There are mortgage companies that will use your bank statements as proof of income, but you may have to meet certain conditions and you may not get the most favorable terms on your mortgage, such as a higher interest rate or higher down payment requirement.
For self-employed people, buying a house requires more preparation than for W-2 employees. Apart from being careful what expenses you include in your tax declaration, if you have a registered business, you should keep your personal and business finances separate. As I would advise any buyer, save as much as you can in order to cover expenses related with the purchase of a home, moving, and small renovations after the purchase.
I am always available to answer any questions and refer you some of the best mortgage professionals in Atlanta, GA that I trust will do a great job for you.
Check out this article full of tips for self-employed borrowers by Roland Varblow
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