Buying a home when you're self employed is a completely different process than buying one with a W-2 job. Not harder exactly, just different. A lot of business owners, contractors, freelancers, and commission earners in Sandy make great money and still get told they qualify for way less than they expected. Usually it comes down to one thing. The income on their tax return looks a lot lower than what they actually bring in, because they've done a great job writing off expenses. As a business owner myself, I get it. The good news is that there are a bunch of ways to get self employed buyers qualified, and it mostly comes down to working with the right lender and planning ahead. Here's how it works.
Why Self Employed Buyers Look Like They Earn Less
When you work for an employer, a lender looks at your pay stubs and W-2s and has a pretty clear picture of your income. When you're self employed, the lender usually looks at your tax returns, and specifically at your net income after business expenses.
That's where the problem shows up. A lot of people who are self employed have a lot of tax write offs. Their vehicle, their phone, their home office, equipment, travel, meals, software, all the legitimate costs of running a business. That's smart for taxes, because it lowers your taxable income. But when you take that tax return to a lender, it shows that you're making a lot less than you actually are.
So a contractor who grosses $250,000 but writes off $140,000 in expenses might show around $110,000 in net income. The lender is generally going to qualify them based on something close to that lower number, not the $250,000. That gap can change the price range by hundreds of thousands of dollars, which in a market like Sandy can be the difference between the home you want and one you settle for.
Work With a Lender Who Actually Does This
This is the single biggest thing I tell self employed buyers. Go with a lender who actually works with self employed people and understands how it works, because it really is a different process.
An experienced lender knows how to read a business tax return. They know which expenses can be added back to your income. Depreciation is a common example, since it reduces your taxable income without actually costing you cash that year. They know how to handle income that went up or down from one year to the next. They know what to do with an S-Corp, a partnership, or a sole proprietorship, since each one shows up differently on paper. And they know when a different kind of loan will get you further than a standard one.
A lender who mostly works with salaried borrowers may just take the bottom line on your return and stop there. That can leave a lot of qualifying power on the table. We work with lenders who handle self employed borrowers all the time, and we're happy to connect you.
Loan Options That Can Work
There are all sorts of ways to help self employed people get qualified. Here are some of the most common.
Conventional and FHA loans are often the first stop. These usually look at your last two years of personal and business tax returns, sometimes with a year to date profit and loss statement. If your business has been around a while and your returns show solid income, this is usually the lowest rate option. Some lenders can work with just one year of returns in certain situations, depending on how long you've been in business.
Bank statement loans are another option. Instead of tax returns, the lender looks at 12 or 24 months of your business or personal bank statements to estimate your income based on actual deposits. These are designed for self employed buyers whose tax returns understate their real cash flow. The tradeoff is usually a higher interest rate and a bigger down payment than a conventional loan.
There are other options too, like loans based on 1099 income for independent contractors or loans that consider large savings and investment accounts. Not every buyer fits every program, which is exactly why the lender matters so much.
Start Planning Earlier Than You Think
If you're planning on buying a house within the next year, start talking to a lender now. It's never a bad idea to get an idea of where you stand.
The reason it matters so much for self employed buyers is that your tax returns drive your qualifying income, and you can't change last year's return after it's filed. If you talk to a lender before you file, you can have a conversation with your CPA about the tradeoff between writing off every possible expense and showing enough income to qualify for the home you want. Sometimes paying a little more in taxes for a year or two is worth it if it qualifies you for a much better home.
Planning early also gives you time to clean up the rest of your file. Keep business and personal finances in separate accounts. Have a current profit and loss statement ready. Pay down personal debt if your debt to income ratio is tight. Avoid big new purchases on credit. And keep your business licenses and records organized, since lenders may want to verify that your business is active.
Buying in Sandy as a Self Employed Buyer
Sandy is a popular spot for business owners and remote workers. You've got easy access to I-15 and I-215, TRAX stations, quick canyon access for skiing and hiking, and a mix of homes from 1970s split levels to newer builds in the foothills. A lot of self employed buyers also want a dedicated home office or extra space for equipment, which makes the larger lots and finished basements in Sandy appealing.
If you're competing for a home there, a strong pre approval from a lender who has fully reviewed your self employed income can make your offer just as competitive as a buyer with a W-2. Sellers and listing agents want to know you can close. A lender who has actually looked at your returns, not just run a quick estimate, gives them that confidence.
Frequently Asked Questions
How do lenders calculate income for self employed borrowers?
Most lenders start with your tax returns, usually the last two years of personal and business returns, and look at your net income after business expenses, not your gross revenue. They often average the two years, and if income dropped from one year to the next, they may use the lower number. Certain expenses, like depreciation, can sometimes be added back because they don't reflect cash you actually spent. Lenders may also ask for a year to date profit and loss statement and business bank statements. How this is calculated can vary based on whether you're a sole proprietor, partnership, or S-Corp, so working with a lender experienced with self employed borrowers can make a big difference in how much you qualify for.
Can I get a mortgage with only one year of self employment?
Sometimes. Many conventional loan programs prefer two years of self employment history, but some lenders will consider one year of tax returns if you have a strong history in the same line of work, such as moving from employee to business owner in the same industry. Others may require the full two years. Bank statement loans and other non traditional programs may also be options, though they usually come with higher rates and larger down payment requirements. If you're newly self employed and thinking about buying, talk with a lender early. They can tell you exactly what you'd qualify for now and what would change after another year of tax returns.
What is a bank statement loan?
A bank statement loan is a mortgage designed for self employed borrowers that uses your bank statements, usually 12 or 24 months, to estimate your income instead of your tax returns. The lender looks at your deposits and applies a formula to estimate your business income. It's helpful for business owners whose tax returns show much lower income because of write offs. The tradeoffs are that these loans typically have higher interest rates, often require a larger down payment, and may have higher fees than conventional loans. They can be a great tool for the right buyer, especially if your real cash flow is strong but your tax returns don't show it.
Should I write off fewer expenses to qualify for a mortgage?
It can make sense for some buyers, but it's a decision to make with your CPA and your lender together. Writing off fewer expenses means paying more in taxes, but it also shows higher net income, which can increase how much you qualify for. For some self employed buyers, paying a bit more tax for a year or two is worth it to buy a better home or get a lower rate with a conventional loan instead of a bank statement loan. The key is planning ahead, because lenders use the returns you've already filed. If you're planning to buy within the next year or two, have that conversation before you file your next return.
If you're self employed and thinking about buying in Sandy or anywhere in the Salt Lake Valley, reach out. We'll connect you with a lender who knows how to work with business owners, help you understand what you'd qualify for, and put together a plan so you can shop with confidence.
