Just a few tips for those who are self employed and want to apply for a mortgage loan. I'm by no means an expert, but I've learned some things along the way, and my saga STILL continues. These arent rules, just my experience.
Being single, non-homeowner, no children, and a small business owner I get taxed through the roof. But if you know you are going to be buying a home, it may be worth it to NOT take all your deductions so you can get a decent lean (provided you can afford it and the deduction is not reoccurring). For instance, I had 4k in continuing education costs. This education allowed me to increase my income because it added to the services I could do at my business, a fact that was reflected in my current bank statements. Unfortunately, that 4k cant be added back to my cash flow, and thus, this investment, which I am seeing a return on, is actually counted against me because it lessened my taxable income for that year. The increase in my income on my bank statements didn't matter either. It all came down to the previous years taxable income.
Make sure your taxable income is INCREASING. Gross growth doesn't matter. My gross was higher, but because I had more deductions (thanks in part to that 4k in education), the lender would not use my previous years (higher) taxes for an average. So I qualified for less. Of course, if your income is increasing, they'll probably average out previous years lower taxable income with your new higher income. Thus, lowering what you'd qualify for on your current income. But it still beats having a decreasing taxable income.
Talk to your accountant about depreciation vs writing off certain equipment and such up front. Depreciation may be added back to your cash flow, where claiming all the cost at once, wont. One time costs (like my 4k education), in my opinion, should be added back to cash flow and only reoccurring costs should not be added back, but unfortunalely for us, its NOT the reality.
Be ready with profit and loss statements. If you are a sole proprietor with a cash based business your bank statements probably wont match your P & L's, since sometimes we use cash to purchase business expenses, etc. That makes P & L's almost pointless and thus really irritating if you have to put them together at the last minute. Just remember, you are self employed, you should be used to being kicked around.
If you can, make sure you deposit ALL your cash for at least 3 months before you want to apply for a loan. No need to beef up the P&L's. If they show HIGHER than your statements, they wont count towards your income. If they show LESS, it may be used against you. It should basicly be just a way of explaining what your statements show (for instance, that $400 check for that month was electricity, etc).
Once I close on a house, I'll post more of what I learn. Cant wait to see whats in store, lol.
Being self-employed sometimes make you want to drive your car off a cliff, but just remember that you are creating jobs and contributing to our economy and society in a positive way. At the end of the day our only boss is God (if you believe in a higher power), and our customers.
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