If you’re a business owner, freelancer, or other self-employed professional, you’ve likely done all of the following when preparing your taxes: saved your receipts, claimed eligible deductions, and legally minimized your tax bill. But when you go to buy a house, one question may come to mind: Can you qualify for a mortgage after writing off business expenses?
The short answer is yes. Many self-employed borrowers successfully qualify for mortgage loans each year, although the types of business expenses they deduct can affect how lenders calculate their qualifying income and how much they can borrow. Here’s what you need to know and how to prepare.
Success Rate for Getting a Mortgage After Writing Off Business Expenses
There is no official one-size-fits-all success rate for self-employed buyers, as approval is an individual matter based on your overall profile as a borrower, not write-offs alone. Self-employed buyers are approved year on year as long as they prove consistent, well-documented income.
Your chances improve when you have:
- Net income for two years, stable or growing
- A strong credit score and low debt
- A solid down payment and cash reserves
- Clean, separated business and personal records
- Properly documented add-backs, such as depreciation
Significant deductions may lower your qualifying income, but bank statement loans and other mortgage options may still help you qualify. Discussing your circumstances with a knowledgeable mortgage loan originator early in the process gives you an opportunity to explore available programs, calculate your qualifying income, and develop a tax strategy with your tax professional before applying.
Why Write-Offs Matter to Mortgage Lenders?
Business write-offs or deductions, they are also known, lower your taxable income. This is great news for your tax return, but it’s not how mortgage lenders evaluate your gross income. It is how they evaluate the net income in your tax returns, after expenses are paid.
Say you have $150,000 in gross sales, but you write off $70,000 in valid costs. Your business has $80,000 taxable revenue. A mortgage underwriter sees $80,000 as your revenue and not $150,000. Too many aggressive write-offs can make a successful business look very small on paper.
This is why self-employed borrowers sometimes feel that lenders penalise them for intelligent tax planning. They aren’t judging your accountant. They just want some evidence that your income is consistent, documented, and proven for repayment.
How Lenders Verify Self-Employed Income?
Salaried employees generally submit pay stubs and W-2s. Self-employed applicants go through a more thorough process. For these individuals, most lenders will request:
- Complete two years of personal tax returns with all schedules included.
- If you are a corporation, partnership, or S corporation: two years of corporate tax returns;
- A year-to-date profit and loss statement that displays your current results.
- Recent bank statements of business and personal accounts.
- Established business proof, such as a business license or CPA letter.
Your net income is generally averaged over the past two years. If your income is increasing, that may help you qualify. However, if your income has declined, lenders may use the lower, more recent income amount or request additional documentation.
What Expenses Can Be Added Back?
Now for the good news. Underwriters understand that not all business expenses involve actual cash leaving your business. Certain non-cash or nonrecurring expenses may be added back to your qualifying income. Examples include:
- Depreciation: A non-cash deduction that spreads the cost of equipment, vehicles, or other business assets over several years.
- Depletion and amortization: Similar deductions that may be added back when calculating qualifying income.
- Business use of home: Certain home office deductions may be added back, depending on the loan program.
- Nonrecurring expenses: Certain one-time expenses may be considered for an add-back if properly documented and permitted by the lender’s guidelines.
Ongoing expenses such as wages, rent, supplies, advertising, and cost of goods sold generally cannot be added back to qualifying income because they are regular business expenses. The specific deductions and add-backs allowed vary by loan program and lender guidelines, but these examples provide a general idea of how the process works.
How Write-Offs Affect Your Debt-to-Income Ratio?
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that you pay toward your monthly debt payments. Write-offs make it seem to lenders that you have less income than you actually do and therefore may increase your DTI.
Suppose your qualifying income is $6,500/month, and you pay $3,000 in total monthly debt, including the new mortgage payment. That would give you an overall DTI of around 46%. If a closer examination of your deductions revealed you qualified for $7,500 of income, your DTI would be closer to 40%. That can make the difference between getting approved and at what rate.
Loans For Self-Employed Borrowers
If your tax returns don’t tell the full story of what you earn, don’t worry. You might be able to consider:
- Usual credit: a smart choice if your roi can demonstrate regular earnings and you have good credit.
- FHA loans: less rigid down payment and credit score requirements, but a minimum of two years of self-employment history.
- VA and USDA loans: for qualifying veterans or borrowers seeking property in rural areas, respectively.
- Bank statement loans: a non-QM loan that uses 12 to 24 months of bank statements instead of tax returns to qualify.
- Profit and loss (P&L) loan: yet another documented loan program for borrowers who have sufficient cash flow but low taxable income.
Non-QM loans have a tendency to carry marginally larger rates and require larger down payments, but when regular homebuyer programs aren’t a good fit, they may be able to get you into a home. An expert mortgage lender can help you compare.
Intelligent Steps To Take Before You Submit Your Application
The ideal time to plan for a mortgage is long before you actually apply for one. Here’s what you can do:
- Do so at least 12 to 24 months before you buy so you can strategize your taxes accordingly.
- Discuss it with your CPA. Tell your accountant you’re thinking of purchasing a home. They can help you to weigh tax savings versus borrowing power.
- Separate business and personal accounting. Precise, clean records allow for quicker, more streamlined underwriting.
- Build your credit. Reduce your balances, don’t take on any new debt, and review your credit reports for mistakes.
- More down payment, fewer payments. The greater the down payment, the less the risk to the lender of taking on the debt.
- Don’t make big changes right before you apply. Changing jobs, making big purchases, or moving money between accounts can be warning signs.
Should You Stop Writing Off Expenses?
Not necessarily. Choosing to claim fewer business deductions in an effort to appear more profitable could cost you thousands of dollars in additional taxes and may not be worth it. The best approach depends on your financial goals, when you plan to purchase a home, and how much you want to borrow. In some situations, claiming fewer deductions for a tax year may make sense if the increase in qualifying income significantly improves your borrowing options. In other cases, a bank statement loan may be a better solution. Consult your CPA and loan officer to determine which approach is right for you, as each can provide a different perspective.
Final Thoughts
While claiming business write-offs can affect how lenders evaluate your income, it doesn’t necessarily prevent you from getting a mortgage. It simply means lenders may calculate your qualifying income differently. With proper documentation, an understanding of which expenses can be added back, and the right loan program, self-employed borrowers can successfully qualify for a home loan.
We at Reliance Financial says; preparation is key, and working with a lender who understands how entrepreneurs earn their income can make a difference. Whether you’re a sole proprietor, small-business owner, or freelancer, the right guidance can help you turn your hard work into an opportunity to own a home.
Frequently Asked Questions
1. Is it possible to qualify for a mortgage if I do a lot of business write-offs?
Yes, you can. While your gross income is used by lenders to determine qualifications, heavy write-offs can reduce your qualification levels, but there are other programs like bank statement loans that may be applicable.
2. What income do the banks see?
The net income reported on your tax returns, averaged for the past two years. Non-cash deductions, such as depreciation, can frequently be added back, which increases your qualifying income.
3. How many years of self-employment history do I need?
The majority of lenders are seeking two or more years of proof of self-employment with income that is stable. There are a few programs that will consider less if there is existing experience in that field, but it does change from lender to lender.
4. Is a bank statement loan a good option?
It can be when tax returns point to low income, but deposits are healthy. These are just based on 12-24 months of bank statements, but with higher rates and bigger down payments.
5. Should I stop claiming deductions before applying?
Not always. Not claiming permissible deductions can increase your tax bill. Consult your CPA and mortgage expert before choosing between tax benefits and borrowing capabilities based on your timeline and objectives.
6. What increases chances of approval?
Establish good credit, reduce current debt, make a larger down payment, maintain separate business and personal finances, and keep well-organized records. Submit an application with steady, verifiable income.
