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Maximizing Income vs. Using Business Write-Offs: A Balancing Act for Self-Employed Mortgage Qualification

Maximizing Income vs. Using Business Write-Offs: A Balancing Act When Qualifying for a Mortgage

If you’re self-employed and planning to buy a home, refinance, or transfer your mortgage, balancing income and tax write-offs is crucial when tax season arrives. Your financial profile plays a significant role in mortgage qualification, and understanding how lenders assess self-employed income can make a big difference in determining how much you can borrow. In this article, we’ll explore how lenders evaluate self-employed income and how your net business income impacts your mortgage eligibility.

The Importance of Income When Qualifying for a Mortgage

Higher Income Equals a Larger Loan Amount

Lenders base their mortgage approval decisions largely on income. Simply put, the more you earn, the more you can borrow. A higher reported income increases your borrowing power and enhances your chances of getting approved for the loan amount you need.

A key factor in mortgage qualification is your Gross Debt Service Ratio (GDSR)—the percentage of your income that goes toward housing costs. Lenders typically require this ratio to be no more than 39% of your income. A lower GDSR indicates financial stability and makes you a more attractive borrower. For example, if you earn $100,000 per year compared to $50,000, you’re likely to qualify for a larger mortgage and a more expensive home.

Another important metric is your Total Debt Service Ratio (TDSR), which accounts for all your debt obligations, including housing costs, credit cards, and loans. Traditional lenders usually set a maximum TDSR of 44%. A higher debt load can reduce your borrowing capacity and make mortgage approval more challenging.

The Flip Side: Write-Offs and Mortgage Qualification

While maximizing income can help you qualify for a larger mortgage, using business tax write-offs—while beneficial for reducing tax liability—can have unintended consequences. Lenders assess net business income (after deductions), and excessive write-offs can lower your reported income, potentially impacting mortgage approval.

Business Write-Offs Lower Your Net Taxable Income

For business owners, freelancers, and self-employed individuals, tax write-offs are a great tool for minimizing taxes. However, deductions such as marketing, advertising, and other business expenses reduce net business income, which is the figure lenders use to assess mortgage eligibility.

For instance, if you earn $100,000 but claim $30,000 in write-offs, your net income is $70,000. Since lenders typically average two years of self-employed income, excessive deductions can lower your mortgage qualification amount.

Striking a Balance: Maximizing Income Without Sacrificing Write-Offs

So, how do you balance reducing taxes with qualifying for a mortgage? Here are some strategies:

1. Plan Ahead for Mortgage Qualification

If you plan to buy a home in the next two years, consult with a financial advisor, accountant, and mortgage broker now. A mortgage expert can help you understand how lenders assess your income, while your accountant can develop strategies to optimize your reported income for mortgage qualification. In some cases, paying higher taxes in the short term may improve your borrowing ability.

2. Work with Professionals

Tax planning is essential for self-employed individuals. Your accountant can advise on structuring expenses and income to balance tax savings with mortgage eligibility. Financial planners can assist with home savings strategies and guide you on investment withdrawals when preparing to buy. Need suggestions on who to work with, visit our resource page.

 

Conclusion

Maximizing your income is a proven way to boost mortgage qualification. However, if you rely heavily on business write-offs to reduce taxable income, you may face challenges securing the loan amount you need. Finding the right balance between tax efficiency and mortgage approval is key. By planning ahead and working with financial professionals, you can navigate these challenges and confidently prepare for homeownership.

Have questions? Contact Us—we’re here to help! Or click here to Apply Now.

 

Mortgage Options for Self Employed

Self Employed : Mortgages

Woman working hard at her business

Business Owner? There are options for mortgage financing.

Being self employed has many advantages, like setting your own schedule and being your own boss.  You also have the advantage to write off items to decrease your taxable income.  This is great when it comes time to pay the Government, but can create challenges when you are planning on borrowing.  There is a major advantage to working with a broker who is well versed in Business for Self (BFS) programs available.

The Gold Standard for Self Employed

The most universal method to calculating self employed individuals income is by taking a 2 year average.  To achieve ideal interest rates, a 2-year average of your NET income is used.  That means your gross income is not the amount being used to calculate your capacity for a mortgage.  All write-offs and deductions are used to calculate your Net Income.  If your Net income has been declining, the lower amount is used for qualification purposes.  In an ideal world, real estate transactions would be planned a few years in advance–allowing for pre-planning with your accountant.

Traditional Lending – New to BFS

There are programs available through traditional lenders for clients who have less than 2 years self employed.  The requirements include having to have worked in the same industry as before they became self employed.  The client needs to be able to show that they have a history in the industry to qualify for this program.

Subprime Lenders

Subprime lenders offer solutions to a variety of self employed individuals.  Clients could be new to their industry, or well established but their past years net income isn’t an accurate reflection of current income.  Regardless, there are Subprime lenders who might be able to help.  Subprime lenders will complete a review of your business bank statements for the past 6-12 months. Lenders review deposits and deduct expenses to arrive at an income amount that will be used for qualification.  Having flexibility in income qualification does come with additional costs.  Interest rates are generally 1-2% higher than a traditional lender, plus there is a lender fee.

Why use a Mortgage Broker

Mortgage Brokers have access to a variety of programs and options for self-employed individuals.  If you’re working with clients who are BFS it’s important they know what’s available.  Brokers have access to multiple programs and lenders, and can ensure that client’s buying power is at it’s full potential.  This gives the client an advantage; providing them with multiple possible solutions.

For more information please call Kevin, Jason or Blaire today 250-753-2242

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Subprime vs Traditional Lending

 

Coming from a traditional lending background, I’ve often thought of mortgage lending as a puzzle. In order to help the client, every single piece is necessary to get them what they need.  Credit has to be solid, the income both consistent and sufficient, the security (house) had to be in a good location in a decent condition.  All this is required. Without every piece in place, the puzzle just wont work!  The thing is–people’s lives can be complicated, messy even. Puzzle pieces go missing, and some don’t QUITE fit.  

Traditional Lending

Lets explain; Banks, Credit Union’s, and Monoline Lenders (companies regulated by the bank act who offer single products, in this case mortgages) all have to adhere to specific rules set by the Government.  Within those rules, the companies themselves can work with their board, risk management and shareholders to ensure that their best practices are within those rules.  They may decide to assume more risk in one area but less in another. Offering products or programs that target specific audiences. Acting within the letter of the law and their internal policies and practices.  For the most part, doing the same puzzle, with the same pieces.  

Subprime

Subprime, or “B” Lenders, do not have to adhere to the same rules as big banks.  Privately owned, operated and regulated they offer their own unique pieces to the puzzle.  These lenders offer assistance to borrowers who aren’t a fit for the major lenders, so credit issues, self-employment or lack of sufficient income fits for them.  They have more flexibility in how they lend and who they lend to. 

Of course, guidelines are still in place, they merely have more of a landing pad for the “unbankable”.  Anytime a lender is taking on higher risk mortgages, there is a premium for that, and with subprime lenders it translates to higher interest rates than other lenders, and sometimes lender fees.  It would be easy for a person to sit back and form opinions based on the idea that they are charging what they are. Some might say that the people seeking money from these companies “shouldn’t even be borrowing”.

Self Employed

For our self-employed clients, the general rule of thumb is that lenders want to see the last two year’s income tax returns (T1 Generals).  For a self-employed individual, this may not be the most current and accurate version of their finances.  Subprime lenders offer Business for Self programs such as stated income that require the last 6 months of business bank statements to support the cash flowing into the company.

Credit Issues

If you go bankrupt or file a consumer proposal you’ll generally be waiting 2 years from your date of discharge in order to be a candidate for a mortgage at a bank or Credit Union.  With subprime lenders, they consider you right away.  Their minimum credit requirements are significantly lower.  Many people may think that once their mortgage is placed with a Subprime lender that they’re going to be with them forever. This is not true.  Often clients will work with their Mortgage Broker to make a plan to make their way back to an A lender.  This could mean a variety of things. A hyper focus on paying bills on time, to earning additional income.  Whatever it may be, you won’t be alone, our Brokers will work with you to set a plan and will continue to check in to help keep you on track.

Stigma

There tends to be a real stigma out there about the Subprime lending world. In a situation where you may lose the house because of lack of income, an illness, a bad relationship or business venture that left you in a tough spot–There are options for you.  Of course the ideal lending situation is to be able to have a mortgage through a major bank, or monoline company. The interest rates will be less and there will be less fees.  No one is disputing that. 

However, in my decade and a half in the finance world to confidently say that there are many of us who “do not make the mark” set by banks.  I feel fortunate to be able to offer people solutions that fit their situation, to meet them where they are.  In many cases the solutions will help them maintain or improve their housing situation, and help their financial situation.

Being a mortgage underwriter at a traditional financial institution for many years, my experience with lending was limited to our own products and services. Helping people to have access to the Subprime lenders gives me the ability to help people work with what they have.  Putting their puzzles together in a way that works for them! 

I am grateful and appreciative of the opportunity to offer mortgage and financing solutions for our clients.  Interested in learning more, or have questions about your own ability to qualify for a mortgage please call or email us.  If you’re buying, renewing, refinancing we would be more than happy to help work with you to figure out your options.

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