Mortgages for the Self-Employed

by James & Penny Lamb 01/12/2020

Photo by Free-Photos via Pixabay

When you’re self-employed, it’s difficult to decide whether you are ready to buy a house. After all, your income might come in spurts instead of having a regular check every week or two. Being prepared for the mortgage process increases the chance that your application will be approved. Self-employed people have more hurdles to jump because of the nature of their income, even those that make six or more figures.>

Difficulties in Qualifying for a Mortgage

Since you’ve probably done a ton of research on mortgages and finding your dream home, you already know the basics—make sure your credit is good, how much down payment you’ll need and what you are able to afford. You may have a pretty good idea of what documents you need to provide and already have them ready. However, those pesky tax returns might come back to bite you.

Tax Returns

The biggest problem in qualifying for a mortgage when you’re self-employed is your tax returns. Most business people take every deduction allowed. However, while that’s great for your pocket since you pay less tax, it’s bad for applying for a mortgage.

Part of your self-employment tax returns is your expenses. You probably claim things like utilities, cell phones, business meals and travel and have a ton of depreciation. When a lender looks at the tax returns, it doesn’t add those things back in—except for depreciation. While you might make $300,000, your adjusted gross income on your tax return is going to be the number the lender looks at. If it’s $10,000, you’re not going to qualify for that loan.

Alternative Methods

You could amend your taxes or you could wait for two years and not claim anything on your taxes. However, that means you will be paying heavily to the IRS. Or, you could find a lender who does non-conforming loans. Some lenders are sympathetic to self-employed people and will use other methods of verifying income. Some banks may look at your deposits for a year instead. They’ll still ask for your tax returns, but will not use them to qualify your income.

Debt-to-Income Ratio

Your tax returns help lenders figure your debt-to-income ratio. While lenders are supposed to use your gross income, that does not hold true with self-employed borrowers. Lenders look at the adjusted gross income on your tax returns. That number is often lower than net income because of the expenses you deduct.

A lender adds up your debts and divides that number by your adjusted gross income. If you have a proposed mortgage payment of $1,200, a car payment of $650 and other credit lines, including credit cards of $500, you have $2,350 in debt. If your self-employed monthly income is $8,000, your debt-to-income ratio should be about 29 percent. But wait a second. That’s not the number on your tax returns.

If the adjusted gross income on the last two years of tax returns is $4,000 and $2,500 respectively, then your average monthly income is going to be $3,250 (add the two together, then divide by 2). That means your debt-to-income is actually 72 percent. The highest a lender will “give” you is 43 percent, though most will only consider your application if your debt-to-income is 39 percent not including your new mortgage and 33 percent including your new mortgage. In this example, a lender who uses deposits instead of tax returns will show a debt-to-income ratio of 29 percent.

If you are ready to purchase a house and want to learn more about qualifying for a loan, feel free to reach out. Together, we'll be able to get you into the home of your dreams, despite the hurdles.

About the Author

James & Penny Lamb


Associate Broker/Owner

Office: 517.552.0222
Cell: 810.599.3921
Email: [email protected]

Livingston County has been home to me since I returned from military service. I have been active in the Howell community and have served on many local boards, including the Chamber of Commerce. I have owned and operated businesses in the area and am a member of the Livingston Assoc. of Realtors, Michigan Assoc. of Realtors, and the National Assoc. of Realtors. If you just have questions regarding real estate feel free to call me anytime. Just ask for"Jim The Broker". 



Office: 517-552-0222
Cell: 810-599-3923
Email: [email protected]

As a 4th generation, lifetime Livingston County resident, I am extremely knowledgeable about the community and have 30 years of sales experience. I am a proud member of the Livingston County Assoc. of Realtors, Michigan Assoc. of Realtors, and National Assoc. of Realtors. I work with Buyers and Sellers offering a free CMA report to help you decide how to price your home to "SELL" in this current market. I look forward to assisting you with all your real estate needs. Livingston County is a wonderful place to live and I look forward to sharing with you all the reasons why. Call today and ask for "PENNY LAMB".


Associate Broker

Cell: 810-599-3925
Office: 517-552-0222
Email: [email protected]

I am a lifetime resident of Livingston County with over 15 years in the real estate industry. After attending college at both Flagler in Saint Augustine, FL and Northern Michigan University in Marquette, MI and graduating with a BA in Communications, I returned to Livingston County to start my own family and to work with my parents to establish our family owned Real Estate One Howell office. Working with buyers and sellers to find the perfect home, is my passion. I pride myself in following every detail throughout the process, personally, to provide the highest level of customer service possible. I also genuinely enjoy what I do and like to ensure that everyone is having a positive experience when buying or selling. I strive to see smiling faces at the closing table and establish my clients for life.



Office: 517-552-0222
Cell: 517-861-1978
Email: [email protected]

Hi, I am a licensed Realtor of Real Estate One Howell. I was born and raised in Livingston County and attended Howell High School. After graduation, I attended Grand Valley State University and obtained a degree in Business Administration. I then moved to Chicago, IL and lived there for 7 years before returning back to Livingston County in the fall of 2002. I am a member of the Livingston County Association of Realtors and an active member of the community.