The Hurdles That Small Business Owners Face When Getting a Home Loan

Here’s what small business owners need to know when buying a home.

It’s common for small business owners to take advantage of tax write-offs, but this can make getting a home mortgage tricky. Your tax returns are required when looking for a loan, but they likely aren’t helping your home-buying endeavors. Fortunately, there are some things you can do. I spoke to Ken Pitts of First Choice Mortgage Advisors, who gave some great advice on how small business owners can qualify for a mortgage.

"A person could have a $10 million business but use write-offs in a way that they only take home $120,000 a year, but the lenders don’t look at business revenue—they look at what your taxes say you made."

One challenge self-employed borrowers face is that their income is averaged over the last two years. However, if the most recent year is worse than the previous year, lenders will go with the more recent income—they like to stay as conservative as possible. Though business owners use tax write-offs, lenders go off adjusted gross income instead of gross revenue. So if you use too many write-offs, it can hurt you when you’re trying to get financing.

Lenders can add things like depreciation, depletion, amortization, and business miles back onto the income, which can be helpful for professionals like truck drivers or salespeople. It’s still always a challenge for business owners, as they may make a lot of money in gross revenue but not have it show on their bottom line. A person could have a $10 million business but use write-offs in a way that they only take home $120,000 a year, but the lenders don’t look at business revenue—they look at what your taxes say you made.

The COVID-19 pandemic created even more hurdles. Lenders need profit-loss statements within 30 days of closing now, as they want to see that businesses haven’t been affected by the pandemic. Business tax returns and transcript-checking by lenders are also affected, especially when the IRS is running behind schedule. Lenders also need to ensure that a business owner’s other loans haven’t been affected by COVID-19.

If you have a business that’s beyond a Schedule-C, such as a corporation or LLC, it’s very problematic to use assets from your business account to buy a home. You’d need to get an accountant involved who can verify that using your funds won’t negatively impact the business. Few accountants want to do that, let alone take responsibility for it. Ken always advises people to avoid writing a check through their business; instead, they should take a distribution to get the money into their personal account.

I’d like to thank Ken for joining me and providing today’s helpful information. If you have any other questions or would like more information, you can check out my website PARealEstateResources.com or reach out to me. If you ask a question that I decide to answer in one of my future videos, I’ll even send you a $25 gift certificate. Until then, I look forward to hearing from you soon.