Thank you for taking the time to share this.  Most insightful information for all!

Love the visual, and great information to share!

I do find that people put themselves through a lot of stress underestimating the value of what they do.

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

Excellent advice Donika! Welcome to ActiveRain.

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.

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. 

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

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

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

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.

Great information, thank you.

If claiming legitimate business expenses, all should be fine.

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. 

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

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

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 :)

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.

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.

Jeff

Thanks for your very informative post. 

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 ...

Gene

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. 

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. :/