Entrepreneurs: How to Get A Home Loan with 1 year or 2 year of Tax Returns

Entrepreneurs, what if I told you that everything you've been told about buying a house as a business owner, is completely just inaccurate.

“You need 2 years of tax returns.”

“You need 20% down payment.”

Right now is the most critical time for an entrepreneur homebuyer. Why? Because it is tax season.

Even if you’re not buying a home until 2024…how you file your 2022 tax returns is key because we may need to average two years of tax returns to determine your qualifying income for your home loan. We do have a conventional loan where we only need one year of tax returns; I’ll expand on that further down.

So, here’s the kicker…you can file your tax returns on time, satisfy your tax bill, but if you don’t know exactly what your mortgage lender is looking for…none of it matters.

For the sake of this post, we’ll assume your business is an LLC. Line 31 on your Schedule C is the absolute most important piece in your tax returns. Fannie Mae and Freddie Mac guidelines require mortgage lenders to use your net operating income as the qualifying income for your home loan.

Sales

-deductions

= Net Operating Income (Line 31)

I cannot stress the net operating income enough. I’ve seen entrepreneurs generate $2mm in sales and report a $10K net operating income. There’s absolutely nothing wrong with that, as tax write-offs are one of the best benefits of being a business owner. However, not so much when purchasing a new home with a mortgage. If you’ve been in business for less than 5 years, we’ll need 2 years of tax returns. We will average the net operating income for both years to determine your qualifying income.

Now, my favorite gem…getting a home loan with only 1 year of tax returns. We have a Freddie Mac conventional home loan program that allows this flexibility. If you’ve been self-employed for 5 years or more, you can qualify for the 1-year tax return conventional home loan with as low as a 5% down payment. The advantage of this loan is...let’s say, maybe the year before you had a baby, or your business was impacted so your net operating income was lower than expected…either way, you won’t be penalized because we won’t see it.

If you’re a business owner, documents we’ll need to process your home loan:

• Last 1 or 2 yrs of tax returns
• Last 2 months bank statements
• Profit and Loss Statement
• Balance Sheet
• Photo ID
• Business Formation Documents
• Recent mortgage statements, if applicable
• Lease agreements on rental properties, if applicable

Please be sure to partner with your mortgage advisor and CPA to receive proper guidance.