Should I take all of my allowable expense deductions on this year’s tax returns or should I show more income so that I can qualify for the mortgage that I need to purchase the home that I want this year? This is a question that many individuals, mostly Self-Employed, ask themselves this time of year. Whether you file a schedule C as a sole proprietorship or your business files an 1120 S business tax return or 1065 Partnership return, you are required to report all of your gross income. But you are permitted to offset that gross income with the expenses that you incurred to earn that income including things like truck and auto expenses, depreciation, advertising expense, the cost of hiring a staff, the cost of transporting goods to market, and even using a portion of your home as an office from which you manage your business. These expenses are deducted from your gross income and you will reduce your net income by declaring these expenses on your tax return. Many taxpayers hire highly trained accounting professionals to maximize their expense deductions so that they can minimize their tax liability. This is a legitimate and well recognized practice across America and one that legitimately allows a business owner to only pay taxes on their net operating income. However in many instances the practice of reducing one’s taxable income using legitimate “write-offs” results in insufficient taxable income than is needed to qualify for mortgage financing required to purchase desired real estate. Many potential homebuyers labor under the false impression that without sufficient taxable income documented in their two most recent tax returns (many loan programs require a two year net income average), they are unable to purchase real estate. We encounter sophisticated business owners on a regular basis who are unaware that there are many alternatives qualifying programs for a mortgage that do not require federal tax returns. These alternatives include using your business’s cash flow to document your personal income and using your personal or business assets to predict future monthly cash flow.

A self-employed taxpayer is not required to declare all of the expenses that they incurred to earn their gross revenue. Many business owners “bite the bullet” and refrain from taking legitimate write offs on their annual taxes so that they can show more net income with the goal of qualifying for a larger loan amount when making mortgage application. In fact this practice often requires them to overpay their taxes for two consecutive years since many loan programs require a two-year average of income from self-employed borrowers. Making this decision can result in tens of thousands of dollars of additional tax liability. If the same self-employed taxpayers were aware of their mortgage qualifying options that do not require tax returns, it’s very possible that many or most would declare all of their legitimate expense deductions to mitigate their tax bill. In fact when most self-employed mortgage applicants find out that non-tax return qualifying options can result in the same or similar interest rates, terms and monthly payment as they would be offered if they were providing their mortgage lender with tax returns, they rethink the strategy of over paying their taxes just to qualify for a particular mortgage. The mortgage industry has evolved to allow self-employed borrowers to take legitimate business deductions, mitigate their tax liability and obtain excellent mortgage rates and terms. No longer are these business owners required to make a choice between smart tax strategy and smart mortgage strategy; these two concepts can coexist in the same universe.

We advise the self-employed taxpayer to review their options with both their mortgage loan officer and their tax professional. This advice may not apply to all taxpayers and thus all taxpayers should double check with their accountant or CPA when considering alternative Mortgage qualifying strategies. That being said, the following mortgage qualifying options should be closely reviewed as alternatives for the smart business owner:

  • Bank statement qualifying programs
  • Asset depletion qualifying programs
  • Trust distribution qualifying programs
  • Debt service coverage qualifying programs

I am happy to provide details of these mortgage programs. Please contact me at (480) 257-9080 or email me at

This is not an offer to lend. Not all applicants will qualify for these programs. Rates and terms are subject to change without notice.