Self-employed borrowers face a bit of a catch-22 when applying for a home loan. The reason is that nobody likes to pay income taxes, and the primary goal of most small businesses is to be profitable, and at the same time, pay as little income tax as is legally possible. Accountants and bookkeepers are always on the lookout for ways to help their clients maximize their business tax write-offs. The problem is that when self employed borrowers show a low profit, it becomes difficult to qualify for a home loan.

Sole Proprietors

Sole proprietorships are individuals who own a business. They file an income statement pertaining to their business with their personal tax return. This is the schedule C statement. It lists all the income and expenses that occurred in the business during the previous year. One of the advantages of owning your own business is that you can write-off many more expenses than you could if you were the employee of a company. The problem, however, is that on paper your business may not appear as profitable as necessary to allow you to qualify for a home loan. If you think you’ll be applying for a loan within the next few years, you should consider taking less tax write-offs so that you’ll show a higher income. This can be a difficult pill to swallow, because no one likes to pay taxes. However, in today’s tight loan market, if you don’t show enough income, you won’t qualify for a home loan.

The following items will be needed for a home loan if you’re a sole proprietor:

• A schedule C from the last two years personal income tax returns.
• A copy of the depreciation schedule (form 4562).
• All additional attachments to the schedule C such as detail on other income and expenses.
• A year to date income statement for the business for the current tax year.
• Copies of the last three months of your business bank statements.
• A copy of your current business license and professional licenses such as MD, etc.,

Corporations

If you own a small corporation, you’re still considered self employed for loan purposes. The documentation for a home loan can be a bit more cumbersome than that required of a sole proprietor. As a corporate owner, you’ll need to include copies of your current pay stubs, the last two years W-2’s, your corporate tax returns, and individual tax returns for the same period. You’ll also need to provide a copy of your corporation financial statements for the current year.

The following items will be needed for a home loan if you own a corporation:

• A copy of the last two years complete, corporate income tax returns
• A copy of the last two year’s individual tax returns
• A copy of your year-to-date corporate financial statements
• Your last two months paychecks received by the corporation
• Your last two year’s W-2s received from the corporation
• Copy of the Articles of incorporation showing you as the legal owner of the corporation
• The last three months corporation bank statements and personal bank statements

Partnerships

If you own a partnership, you are also considered self-employed for loan purposes and the paperwork you’ll need to include for a home loan is similar to that required of a corporation.

This is because a partnership must file a separate tax return in addition to your personal income tax return. The main difference between a partnership and corporation is that as a partner, you’ll receive a document called a K-1 statement, which shows your portion of the net profit or loss from the partnership in addition to any wages that you may have been paid by the partnership.

The following items will be needed for a home loan if you own a corporation:

• A copy of your last two year’s individual tax returns.
• A copy of your last two year’s partnerships tax returns.
• A copy of your year-to-date partnership financial statements.
• Your last two month’s paychecks received by the partnership.
• Your last two year’s W-2’s received from the partnership.
• Copy of the partnership agreement showing your ownership percentage in the partnership.
• The last three month’s partnership bank statements and personal bank statements.

Consult with an Accountant

You should consult with your accountant to plan for the paperwork requirements of a home loan. An accountant may be able to defer expenses to a future year in order to allow your business to show a higher profit for purposes of qualifying for a loan. Also, an expense item, like depreciation, can be added back to your profit for purposes of showing income for your business. For example, if your net profit was $100,000 and this included a depreciation deduction of $15,000, then your adjusted profit for purposes of qualifying for a loan would be $115,000.