Being one's own boss is part of the American dream. However, living that dream can come with challenges. Perhaps the most challenging; how tax returns are treated when applying for a mortgage. Self-employed individuals generally construct their tax returns to minimize tax obligations. Reducing tax liability means reducing net income. Mortgage qualifying is based on the net income as reflected on the tax returns. That approach, when looking to secure a mortgage, creates the challenge.
Developing a self-employed individual's mortgage profile through analysis of the tax returns is intended to identify both cash flow and liquidity. The cash flow analysis identifies the funds that will be regularly available to make a mortgage payment. The liquidity analysis is completed to verify the business keeps enough cash to pass through to the business owner. To that end, the individual's Federal Tax Returns i.e. 1040's, as well as the various business related returns, are required. The tax returns tell the story. The tax returns are expected to be an accurate reflection of the business health and ability to support the owner’s personal expenses.
The means, the Loan Officer to whom a self-employed individual turns to for help with mortgage financing must be familiar with business structures and how to read all aspects of business tax returns. A Loan Officer well versed in the nuances of developing a mortgage profile for a self-employed person will request tax returns, including personal and business, for the last two years. The two-year analysis allows for a thorough development of reliable income.
With planning and forethought, the process will be smooth and successful.