Whether self-employed or an employee, you need to show and verify enough income to qualify for the mortgage loan you are seeking. If you cannot show the income needed, there are alternative strategies to cover the income gap needed such as: (1) Utilizing a co-signer, (2) using liquid assets to qualify under an “asset depletion” program (basically, if you have sufficient liquid assets, a formula is used to calculate income) and/or (3) pledging liquid assets. The stated income mortgage (income is not verified) is pretty much gone for borrowers unless the property and transaction involves an investment or commercial property. That being said, reading this article may be the difference of getting or not getting a mortgage for those borrowers who are self-employed.

Borrowers who are employees typically receive a W-2 and paystub, and are defined as not being owners of the company that employs them. It becomes pretty cut and dry, in terms of income documentation for employee borrowers looking for mortgage financing.

Then there are those borrowers who are self-employed. You may be an employee, but also have your own company as well. As long as you own more than 25 percent of that company, you are considered, in both cases, self-employed and that becomes very important when looking to qualify for a mortgage. Why? Because the usual goal, of most business owners, is to report as little as possible, legally of course, by either deferring the collection of income, increasing expenses or a combination thereof. The old clich? “you can’t have your cake and eat it too” is as pertinent as can be in this situation. The one caveat is that if you make enough income, with deferring income and maximizing deductions, to qualify for a mortgage, then “no harm, no foul.” If you do not show enough income, then you have a problem, but you are not dead in the water. Underwriters typically look at the last two years of filed tax returns and average the income, with certain add backs like depreciation. They also average differently if there is an indication of declining income. There are programs that will ask for only one year tax returns, but the key is having the income needed in that one year in order to qualify. Many businesses are cyclical in nature, and may have good years and bad years of fluctuating income. The main questions to address are:

What are you showing as income at the time you are applying for mortgage financing?

How far along in the year are you?

Did you file an extension?

Do you need to have your numbers reviewed before applying for a mortgage to allow you to make the income adjustments needed in order to qualify?

The most important question: do you want to increase your income, if necessary, and pay additional income taxes in order to qualify for your mortgage?

As an example: It is now the year 2015. Let’s say you wanted to apply for a mortgage in September and have your 2014 tax return on extension. You can provide your 2012 and 2013 business and individual returns. Numbers are reviewed, but you are not showing enough income to qualify. What are your choices?

1. Borrow an amount that you can qualify for and put more money down, if possible.

2. Work on your numbers for 2014 to maximize enough income to qualify, and file the return immediately as all lenders now pull transcripts via a 4506T to verify income reported.

3. Let’s say the 2014 return was filed, and income was still not enough. Wait and time your closing until the second month into the next year— 2016, and file returns immediately at the beginning of the year.

If you are refinancing it may cost you thousands of extra dollars in taxes but:

a. You may save thousands more by obtaining a new mortgage and lowering your payments.

b. Have access to the extra cash you need.

c. You can take a shorter mortgage term, thereby building and accelerating equity and trimming down the term of your existing mortgage which may save you hundreds of thousands of dollars.

d. You can consolidate your existing debt for a lower payment.

If you are buying, you get the new home of your dreams.

In this case, by making your government happy, you may get the biggest bang for your buck when it comes to getting the best mortgage financing for your situation, and always speak to your tax advisor before making any changes to your income.

Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp., a Zillow 5-star lender http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y. He is a residential financing expert and a dealmaker with over 26 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected]

By Carl Guzman, CPA