Self Employed and Buying in 2017?February 02, 2017

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We are in that sweet spot of the year for self-employed borrowers – especially if buying a new home is one of their goals for 2017.  For those who own their business or work independently as a 1099 employee, taxes are little more complicated than the average W2 employee.  There are typically quite a few expenses and business write-offs to take.  These deductions will be the focus of much attention when it comes to qualifying for a mortgage.

In order to get pre-approved to purchase a home, your income is “qualified” to determine what price range you can afford to shop in.  To simplify, this is done based on monthly expenses compared to monthly income.  First, all of the minimum payments on your loans and revolving credit lines are populated from your credit report.  (Bills like cable, car/health insurance and cell phone are not factored.)  Then we look at the proposed housing expense for the new mortgage payment including property taxes, homeowner’s insurance, mortgage insurance and homeowner’s association fees if applicable.  This determines the maximum amount you can afford to spend on a house.

We use the word “qualify” because there are certain formulas used to determine what income can be considered in the mortgage application process.  This is key for self-employed borrowers, because it’s not the income earned for the year – it’s the profit claimed for the year.  Certain deductions can be added back in (which is why it helps to be pre-approved by a well-informed lender willing to get creative).  Most cannot.  So for someone who earns $100,000 a year but has $75,000 written off on their tax return as business expenses – we’re looking at $25,000 annual income to qualify for that new house.

Which brings me back to this very special time of year.  If 2017 is the year you’re hoping to become a homeowner or the owner of a better home, get your taxes together and then…drumroll please…allow your mortgage advisor to review them before you actually file.  They will be able to let you know if you are taking too many deductions in order to qualify for your dream home.  You can consider your options and then file your final return accordingly.