Self-Employed and Want to Buy a Home? Your Tax Returns Might Not Tell the Whole Story
Did you know that being self-employed doesn't have to make qualifying for a mortgage difficult?
I recently had the pleasure of catching up with Gina Gutierrez of Root Mortgage, a wonderful local mortgage lender who helps homebuyers, business owners, and real estate investors navigate their financing options.
One of the topics we discussed was something I think more small business owners should know about: bank statement loans.
What Is a Bank Statement Loan?
If you're self-employed, you probably know that taking advantage of legitimate business tax deductions can significantly reduce your taxable income. That's great for your tax bill, but it can sometimes make qualifying for a traditional mortgage more challenging.
Traditional mortgage lenders often rely heavily on the income reported on your tax returns. But what if your business brings in substantially more money than your tax return suggests?
That's where bank statement loans come in!
Rather than relying primarily on tax returns, these alternative mortgage programs evaluate your business bank deposits to estimate your qualifying income.
How Do Bank Statement Loans Work?
Depending on the lender and loan program, your qualifying income may be calculated using approximately 50% of your business bank deposits, although the actual percentage depends on your industry, business expenses, and other factors.
For example:
Your business deposits $20,000 per month.
The lender allows 50% of those deposits as qualifying income.
You may be able to qualify using approximately $10,000 per month in income, even if your tax return reports a lower amount.
If you have business partners, your ownership percentage will also affect how much income you can claim.
What Do You Need to Qualify?
While requirements vary by lender, you'll generally want to have:
Consistent, documented business bank deposits
Separate business and personal bank accounts
An established history of self-employment
Acceptable credit and sufficient funds for your down payment
Documentation supporting your business ownership and income
And here's something encouraging: Gina shared that some bank statement loan programs may have interest rates only slightly higher than conventional mortgages. Of course, actual rates and terms depend on your individual circumstances and the loan program.
What About Investment Properties?
Gina and I also discussed Debt Service Coverage Ratio (DSCR) loans, another financing option worth knowing about if you're interested in real estate investing.
Instead of focusing primarily on your personal income, DSCR loans evaluate whether a rental property's income can support its mortgage payment and other applicable housing expenses.
These loans may be particularly helpful for investors who have substantial assets or rental income but don't qualify easily using traditional debt-to-income calculations.
Some programs also offer cash-out refinancing, allowing investors to access equity in existing rental properties to help fund future purchases.
Good Tax Planning and Good Lending Advice Go Hand in Hand
At Casler Financial, we help small business owners understand their taxes, maximize legitimate deductions, and plan for their financial goals.
But it's important to remember that reducing your taxable income and qualifying for a mortgage are two different objectives.
If you're thinking about purchasing a home or investment property, it's helpful to talk with both your tax advisor and your mortgage lender before making major financial decisions.
Meet Gina Gutierrez at Root Mortgage
If you're self-employed, considering purchasing a home, or exploring investment property financing, I highly recommend connecting with Gina Gutierrez at Root Mortgage.
Gina is a knowledgeable local lending professional who can help you explore financing options beyond traditional mortgages and determine which programs might fit your situation.
Gina Gutierrez | Root Mortgage
503-929-8462
NMLS #2014002 | Licensed in Oregon and Washington
And if you'd like help understanding how your business income, tax deductions, or real estate investments affect your overall tax picture, we're always happy to help at Casler Financial.
Visit www.caslerfinancial.com to learn more about our tax advisory services.
Mortgage programs, rates, down payment requirements, and eligibility vary by lender and borrower. The examples above are illustrative and do not guarantee loan approval.
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