Tax filing and loan qualifying for self-employed borrowers
This is the ideal time of year for self-employed borrowers to enlist a mortgage broker’s help with tax returns—not as a tax preparer, but because a broker can suggest income strategies that will make obtaining a mortgage easier if they wish to purchase or refinance in the coming year. Self-employed borrowers’ income is treated differently from that of salaried employees, and determining what income is credited to a self-employed borrower can be confusing. Mark Wells of Preferred Financial Services answers common questions on the topic:
I made $100,000 last year. Isn’t that my income? Not if you are self-employed and the $100,000 was your gross income. For self-employed borrowers, only net income is considered mortgage-qualifying income. Net income is the profit you report after you have deducted business expenses.
I write off everything I can so I don’t have to pay taxes. Don’t the lenders know that? They do, and there used to be loan programs that addressed that situation. But since the mortgage crash, the programs that allowed you to state your gross income and not provide tax returns have disappeared.
I pay myself a salary from my business. Do I lose that as qualifying income since it is not part of my profits? No, self-employed borrowers can count 100 percent of the salary they paid themselves as W-2 wages, plus the profit they reported from the corporation. However, if there was a net loss from the business, that loss must be subtracted from your W-2 wages.
Is there any difference in how C-Corp, S-Corp, LLC, or Partnership income is calculated for mortgages? The type of company structure doesn’t really matter—what counts is whether you own 25 percent or more of the company. If you own more than 25 percent you are considered self-employed. If you own less than 25 percent, you are not.
Does that mean if I own less than 25 percent I can’t include any of the profits from the company? No, you are still allowed to include your portion of the net profits in your income calculations.
How can my mortgage broker help me file my tax returns? Along with the normal income you can count when applying for a mortgage, certain business expenses that you deduct (such as depreciation expense) can be added back to your income. A mortgage broker can look at your tax returns before you file them and let you know if you are reporting enough income to qualify for the loan you may take out this year. It may be worth paying a few thousand more in taxes—by not writing off certain expenses—in return for saving tens of thousands by getting a better interest rate with a new mortgage. You may be able to shift certain expenses into an expense category that allows you to add it back to your qualifying income.
I welcome questions and comments, and can be reached at (864) 235-9596, or by email at Mark@TheGreatestRates.com.
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