Self-Employed Tax Returns

 In Qualifying for a Mortgage, Uncategorized

The underwriting guidelines for self-employed mortgage borrowers are different than they are for W2 employees.  Calculating W2 income is relatively straight forward. In most cases, your current W2 income is used to qualify for a loan.  However, self-employed borrowers (and anyone who receives a 1099 instead of a W2 at the end of the year is considered self-employed) have totally different qualification requirements. Here’s what you need to know if you’ve got self-employed tax returns.

Self-Employed Income

Self-employment income is calculated based on the net amount of income that you report on your federal income tax return.  In other words, the income that shows on your tax return after you have claimed all business-related deductions. As an example, if your gross revenue is $100,000 and you claimed $30,000 in business deductions, the amount that a lender can use to qualify you for a mortgage is $70,000.  100,000 – 30,000 = 70,000

We are allowed to add back in some of the deductions, such as depreciation.  We can do that because depreciation is not really an expense, but rather a tax deduction.  You do not write a check to someone for depreciation, but you get to claim it as a deduction when filing your taxes.

Self-Employed Tax Returns

If you have been in the same business for 5 years, we can sometimes use the income that shows on your most recent tax return, but we typically have to average the income over the past two years.  If you have been in business for less than 5 years, then we have to average the income you had over the past two years. There are exceptions to this, so it’s best to contact us to see how much income we can count.

If you need to count the self-employed income you have from last year to qualify for a mortgage, you must file your tax return before we can count it.  That’s important to know, especially if your income was dramatically higher in the past year than it was in previous years. In order to count the higher income, you must file your taxes.

We do many loans for self-employed borrowers and know all the rules.  Contact us today to see how easy it is to get a mortgage.

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