7 Tax Tips Every Business Owner Should Know!
As a small business owner myself I love it when I can help other business owners achieve their dream of homeownership. However, self-employed clients often face unique hurdles, especially when their tax returns don’t align with lender requirements.
Here’s the good news: with the right guidance, they can overcome these challenges. Below are actionable tips to help self-employed clients prepare their taxes with homeownership in mind.
Disclaimer: I’m not a tax professional, and this information is for general guidance only. For specific advice, your clients should consult a qualified tax advisor.
🏀Why Self-Employed Clients Face Extra Hoops
Underwriters often view small business owners as higher-risk borrowers. Unlike W2 employees, your self-employed clients may need to provide:
Personal and business tax returns
Profit and loss statements
Business balance sheets
Proof of tax payments
For approval, the underwriter will look for two consecutive years of stable, reportable income to evaluate their ability to repay a mortgage. Here’s how you can guide your clients through this process.
7 Tax Tips for Self-Employed Clients
1️⃣ Clarify Ownership Percentage
If you owns less than 25% of a business, you might not be considered self-employed under Fannie Mae guidelines. Be sure to verify your tax filing status with your accountant to avoid unnecessary hurdles.
2️⃣ File Taxes On Time
Lenders will require up-to-date tax filings. Buyers with outstanding filings or penalties should resolve these issues ASAP to ensure smoother mortgage approval.
3️⃣ Show Two Years of Profitability
If possible, it is advisable to demonstrate two years of personal and business tax returns that reflect profitable income. This will make their loan application process much easier.
4️⃣ Don’t Over-Leverage Deductions
While maximizing tax deductions may lower taxable income, it can also reduce a buyer’s ability to qualify for a mortgage. Work with them and their tax advisor to strike a balance.
5️⃣ Reduce Debt Levels
Buyers using less than 20% of their available credit are more attractive to lenders. Suggest they pay down debt before applying for a loan.
6️⃣ Organize Financial Records
Lenders may require detailed profit and loss statements, balance sheets, and other business documents. It is highly recommended that you maintain clean, accurate financial records.
7️⃣ Prepare for the Wait
Fannie Mae and Freddie Mac typically require full-year tax returns for income verification. If your financials aren’t mortgage-ready yet, waiting another year to file stronger returns could be the best option.
When Non-QM Loans Are the Perfect Fit
If you can’t qualify for an agency program due to low reported income or other hurdles, a Non-QM (non-qualified mortgage) loan could be the solution. These flexible options cater to business owners by using alternative documentation, such as:
Bank statements to verify cash flow
Asset-based income
Rental property income
Non-QM loans give small business owners more options when traditional financing isn’t the right fit.
💬 Let’s Review Their Options Together
If you or someone you know is struggling to qualify, I’m happy to help review the situation and explore how we can create a game plan for success.
📞 Reach out today, and let’s find the perfect loan solution.
