Tuesday, March 17, 2015

Mortgages, Self Employment and What It Takes



     There are so many benefits to being self-employed.  All the tax breaks, the lax dress code (i.e. pajamas!) and setting your own hours to name a few.  Those tax breaks for your business, especially within the first few years are essential to getting your feet on the ground and making your company a viable success.  However, when it comes to applying for a mortgage loan, those breaks don’t necessarily translate to earned income.  It’s harder as a self-employed business owner to present yourself as a sensible loan candidate to a bank, which is why it requires that much more planning.

     Even if you make an exceptional living, it can prove difficult to qualify for the first-rate home loan your income deserves.  Typically a candidate must provide tax returns from the previous 2 years of an application, which may not necessarily represent your actual take-home pay.  There’s a disparity between what you want to claim for the IRS and what income you want to prove to your mortgage lender.  Your income after business expenses is often much lower than what you are really taking home and can end up not qualifying you for the amount you need, or in the worst case, not qualifying at all.   While some lenders understand this and allow you to add some deductions back to your bottom line for mortgage loan consideration (i.e. depreciations or a one time large purchase), others won’t.  Hence, the planning ahead.  As a self-employed individual, you must be prepared.

  The best option, if available is to make less deductions in the two years leading up to the date you apply for a mortgage loan.  Organize your finances so that personal and business expenses stay as separate as possible.  For instance, making a large purchase on a business credit card may not be counted towards your credit because it belongs to the business.

     Make sure your business shows an increase in income. You may want to consider this when planning the timing of your mortgage loan application.  Banks will average your income over two years to bypass seasonal spikes in revenue, but ultimately they want to see that your business is growing into a success.

     The least attractive option, but still workable, is to have a co-signer on the mortgage.  Otherwise you could opt for a smaller loan easier to qualify for, or look around for a smaller, more manageable investment if that’s the objective.

     The balance between saving your business money during tax time and impressing your potential lender is a delicate one.  However, it is not impossible with the right planning. After all, if you can start your own business, you can do anything!
     

     This is one of the many topics I’m going to cover during our monthly "Lunch and Learn" on Wednesday, April 1st.  Come hear me and Wanda Fears talk about subjects like this as it relates to Richmond small business owners and other self-employed individuals.  It's been such a success, and I can’t wait to hear all of your questions as we learn and lunch together!

Click here to RSVP to our exclusive Lunch Event with the Richmond Business Alliance. 

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