Buying a house when you work for yourself

A lender does not count what your business brought in. It counts what is left after your deductions — the number at the bottom of your return, not the top.

Every deduction that lowers your tax bill in April also lowers the income a lender can use. That is not a loophole or a mistake. It is the same number doing two jobs, and the two jobs want it to point in opposite directions.

Neither answer is wrong. Paying less tax is a perfectly good goal. So is buying a house. They just pull against each other, and the year to decide which one matters more is the year before you buy — not the week you find a house.

The general approach across most programs looks like this. The lender makes the final call on any particular file, and the details vary by program and by investor.

• Two years of returns are normally looked at, and an average taken across them.
• If the second year is lower than the first, the lower figure is often the one used. Underwriting tends to assume a decline continues.
• Some paper deductions get added back, because no money actually left — depreciation is the usual example.
• Income from a business you part-own is read from the business return as well as your personal one.

This is why two people with identical bank balances can get very different answers. One filed to minimise tax; the other filed to show income. Same money, different paperwork.

The label is about how you are paid, not about whether you own a company.

• Paid on a 1099 rather than a W-2 — contractor, consultant, tradesman.
• Owning a meaningful share of a business, even one you do not run day to day.
• Driving, delivering or renting things out as your main income.
• A regular job plus a side business large enough to matter on your return.

If any of those describe you, expect the tax-return conversation, and expect the file to take a little more assembling than a straightforward W-2 one.

Sometimes the returns genuinely understate what a business earns, and there is another way to look at it.

Non-QM lending includes programs that read business bank deposits rather than tax returns. I place these. They exist precisely for the sound business whose return does not reflect it.

What that option costs you: terms and requirements vary widely by investor and are generally stricter than an agency loan, availability moves with the market, and nothing about it is standard. It is a real route, not a shortcut, and whether it makes sense depends entirely on the file.

• Talk to somebody before you file, not after. Once a return is filed it is the record, and the conversation about what it shows is over.
• Keep the business and personal accounts genuinely separate. Money moving back and forth is the single most common reason a self-employed file slows down.
• Expect to explain large deposits. Anything unusual landing in an account gets asked about, and having the answer ready is the difference between a day and a fortnight.
• If you have been self-employed under two years, say so early. It changes which programs are worth discussing, and it is better known at the start than discovered halfway through.