Do Not Shoot Yourself in the Foot if You Are a Self-employed Buyer

Real Estate Agent with Maximum One Greater Atl. REALTORS 302752

  Do not shoot yourself in the foot by declaring too much in business expenseYour 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 







Comments (24)

Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

I think I might give you a follow! :) Go ahead and feel free to follow me back! Love and light!

Aug 08, 2016 07:25 AM
Beth Atalay
Cam Realty and Property Management - Clermont, FL
Cam Realty of Clermont FL

Excellent advice Donika! Welcome to ActiveRain.

Aug 08, 2016 09:03 AM
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Well done.  Don't forget that contracted 1099 employees are treated the same as any other self employed borrower.  Also banks are now taking a hard look at unreimbursed employee business expenses.  But don't worry, the guidelines will change tonight anyway.....and we'll have to start the game all over again.  Always consult your local mortgage professional for the latest in programs and guidelines for your specific situation.

Aug 08, 2016 09:42 AM
Kathleen Daniels, Probate & Trust Specialist
KD Realty - 408.972.1822 - San Jose, CA
Probate Real Estate Services

I know many small business owners who have shot their self in the foot by claiming too many expense deductions.  We cannot have it both ways. 

Aug 08, 2016 09:54 AM
John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Donika Parker This is very good helpful report for a self employed buyer.

Aug 08, 2016 11:18 AM
Melissa Jackson REALTOR
Trinity Premier Properties - Azle, TX
Helping You Make The Right Move

Great information.  Self employment is a two sided sword.  I've had to explain this to potential buyers.  

Aug 08, 2016 12:25 PM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Self employed and small business owners will benefit from these insights.  There are a lot of challenges.

Aug 08, 2016 12:57 PM
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

I loved the good ole' days... I have a stated income mortgage at great terms.  Not sure if they are available now, but just what I needed when I purchased and it was there for me.

Aug 08, 2016 01:21 PM
Tina Hecht
Keller Williams Realty Atlanta Partners - Cumming, GA
Your Smart Solution

Great information, thank you.

Aug 08, 2016 02:20 PM
Kat Palmiotti
406-270-3667,, Broker/REALTOR® - Kalispell, MT
Helping your Montana dreams take root

If claiming legitimate business expenses, all should be fine.

Aug 08, 2016 08:36 PM
Rebecca H. Shaffer
RiversEdge Homes & Properties - Lebanon, TN
The Homesteading Realtor

Important information for our Buyers to have. I learned this the hard way-TN does not have state income tax but if you are claiming any legitimate Federal tax deductions it will reduce your provable income for the purpose of loan approval. 

Aug 08, 2016 11:21 PM
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

For those that need more decent info Donika Parker is gladly standing by to help

Aug 08, 2016 11:55 PM
Harry F. D'Elia III
WEDO Real Estate and Beyond, LLC - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

I have learned that lesson early with separating business and personal exepnses separate.

Aug 09, 2016 12:08 AM
Doug Rogers
RE/MAX Coastal Properties - Destin, FL
Your Real Estate Resource!

Deductions are a catch-22. If they are legitimate, I say take everyone you can. Why pay Uncle Sam more just so you can borrow more? For 1099's cash is king. Walk into a local back with 50% down and I bet you get a loan. Of course you would need to have the 50% down :)

Aug 09, 2016 12:26 AM
Mike Bjork
Evolve Bank & Trust - Redondo Beach, CA

There are good and bad deductions for Self-employed borrowers.  The main thought is what are your Hard (or actual) costs and Soft (or paper loss) cost.  The rule of thumb is to figure the gross from it's hard costs, then you have an acceptable income for qualification purposes.  One of the worst deductions comes from "Meal and Entertainment Exclusion"  (found on line 24b for Schedule C; Schedule M1, line 4b for form 1065 and Schedule M1, line 3b for form 1120S) because the borrower is double-whammied with this deduction (it's factored into the Net Profit), then subtracted from the Net Profit again while the LO is calculating the Income.  Also, be sure to inform the LO about any Corporate expenses, like auto or credit cards.  Many times these are being deducted in the tax returns and those payments show up on the personal credit report; but they're not omitted from their debt-to-income expenses becauase the LO may not be aware of the corporation making these payments.  This is a common error that I find in many income calculations for self-employed borrowers.  They only need to show the corporation making those payments with 12 months cancelled checks (from corporate account) and shown the deductions on the tax returns.  This will help many to qualify too.  Hope this helps.

Aug 09, 2016 03:03 AM
Donika Parker

Great info! Thank you, Mike!

Aug 09, 2016 04:38 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Thanks for some valuable thoughts for those buyers who are self-employed. I think it's important to be very planful about your taxes and deductions at any time, but even more so when planning to purchase a home. Talking to a CPA makes a lot of sense before you get too far in the process.


Aug 09, 2016 03:25 AM
Susan Jackson
America's Network Realty Group, Inc - Sandy Springs, GA

Thanks for your very informative post. 

Aug 09, 2016 06:28 AM
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Unfortunately, self-employed can't always have it both ways.  Taking every deduction they can AND claiming the larger, gross income.  Your post does a great job of explaining to readers why that is true .. and how to move forward to either buy/borrow accordingly ... or change/address the issue, Donika Parker.  I always recommend that someone in this situation meet with their Lender well in advance of hoping to buy or finance.  That way they can prepare themselves better moving forward and are more likely to succeed in their financing goals ...


Aug 09, 2016 07:38 AM
Donika Parker

Yes, I agree, Gene. I always advise people that I work with that it is never too early to talk to a lender (a recommended, trusted one) to make sure that they are prepared to purchase. 

Aug 09, 2016 07:42 AM
Sham Reddy CRS
Howard Hanna RE Services, Dayton, OH - Dayton, OH

Great advice!!!

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. 

Aug 09, 2016 09:51 PM
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

Terrible to say, but this is a real issue when applying for a loan. I have a solution for my self employed clients, but not going to share it here. :/

Aug 10, 2016 04:30 AM