Prior to 2008, many borrowers that were self-employed could obtain home loans without having to provide documentation. With the tightening of mortgage credit that began about 18 months ago, lenders now require self-employed borrowers to provide 2 years of tax returns to document their income. This article is going to discuss how to plan your 2008 and beyond taxes to maximize your ability to qualify and what to know about veterans getting qualified for an VA loan (or any loan) being self-employed.
When you apply for a home loan, you will have to provide your tax returns in the following scenarios (this is not an exhaustive list):
- You are a self-employed sole proprietor or business owner (includes LLC’s, S Corps, partnerships, etc…)
- More than 25% of your income is commission
- You own rental property that you derive income from
- You receive income from dividends, royalties or capital gains that you are using as income to qualify for a loan
- You have income from partnerships or corporations (where you are less than 25% owner) that you want to use to qualify for a loan
- You receive 1099 income that you want to use to qualify
The underwriter will examine your tax returns to determine your income. Generally they will average your net income from the last 2 years to calculate your qualifying income. For example, if you get a home loan in 2009, the underwriter will average your 2007 and 2008 income from your tax returns and that will be the income used to qualify. One common problem here is that many business owners have many business expenses that they write-off bringing their taxable income down to a very small amount that will not qualify them for a home loan. And the underwriter will only count your net income after most of your business expenses (there are some expenses that you can add back to your income that I will discuss later). So since many business owner write-off most of their income, they are having a lot of problems qualifying for home loans right now.
There are expenses that underwriters will add back in when determining your income off of your tax returns. Here are the most common:
- depreciation
- depletion (this is not a common write-off and most will not have this)
- business use of home (such as a home office)
- casualty losses dues to theft, fire or natural disasters
- loss carryovers from prior years (since the loss was in a prior year, it will not be counted against your qualifying income)
- business vehicle mileage
- one-time extraordinary expenses
Since these expenses can be added back, it is a good strategy to maximize these deductions on your 2008 taxes if you plan to buy a home in 2009. Make sure before completing your 2008 tax returns you talk to your CPA or tax preparer and explain that you would like to qualify for a home loan to buy a house and you would like to maximize your net income. Also, mention the above expenses that can be added back in to your qualifying income to your CPA and see if you can maximize these deductions.
If you have further questions or would like to be pre-approved for a home loan, please contact me as I would be delighted to help. And please browse the other articles on www.socalvaloans.com for more information about VA loans.
Warmest Regards,
Rob Chomentowski
Sr. Loan Officer and VA loan specialist
858-922-7899 direct
rob@affinity-financial.com
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