Self-employed person planning mortgage with iQRATE Mortgages.

How Tax Write-Offs Hurt Your Austin & Houston Home Loan

Q: Why do mortgage lenders use my net income instead of my gross business revenue?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: How can certain business expenses actually increase my qualifying mortgage income?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: What are the most common business expenses that lenders can add back to my income?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: How do lenders typically calculate qualifying income from my tax returns?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: What is the purpose of a Profit and Loss (P&L) statement in a mortgage application?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: What documents are generally required to prove my business's stability?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: Are there mortgage options available if my tax returns don't show enough income to qualify?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

Published By

David Ghazaryan

Owner / Broker / Banker

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(702) 766-3744

NMLS 1486726

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TL;DR

For self-employed professionals, qualifying for a mortgage can be challenging because lenders focus on the net income shown on tax returns, not the higher gross revenue a business generates. This overview explains the key factors involved:

Income Calculation: Lenders primarily use your adjusted gross income (AGI) after business deductions to determine your borrowing capacity.
Helpful 'Add-Backs': Certain non-cash expenses, such as depreciation on equipment, can be added back to your net profit by lenders, which increases your qualifying income.
Crucial Documentation: A detailed and accurate Profit and Loss (P&L) statement is essential to show underwriters your business's current financial performance, especially if it's growing.
Alternative Loans: If tax deductions significantly lower your qualifying income, options like bank statement loans exist. These loans use your business's cash flow (deposits) to determine eligibility instead of tax returns.

Why High Business Revenue Doesn't Equal High Qualifying Income

As a self-employed professional in Texas, you understand the importance of minimizing your tax liability. Every deduction for equipment, travel, and home office use helps your bottom line. However, the very tax strategy that benefits your business can become a significant roadblock when you apply for a mortgage. Lenders are not concerned with your gross revenue; they focus almost exclusively on the adjusted gross income (AGI) reported on your tax returns.

This is the core conflict for entrepreneurs: a successful tax strategy often shows a lower net income, which is what underwriters use to determine how much you can afford to borrow.

Consider this realistic example: a freelance marketing consultant in Austin generates $200,000 in annual revenue. After diligently writing off $110,000 in legitimate business expenses (software, co-working space, travel, contractor fees), their Schedule C shows a net profit of $90,000. For mortgage qualification purposes, their income is $90,000 per year, or $7,500 per month, not the $16,667 per month their business actually brought in. This discrepancy can reduce their approved loan amount by hundreds of thousands of dollars, making it difficult to compete in the Austin real estate market.

Common Business Expenses Lenders Can Add Back to Income

While your net income is the starting point, experienced mortgage lenders know that not all write-offs are created equal. Certain deductions are 'paper losses' that reduce your taxable income without impacting your actual cash flow. Lenders can add these specific expenses back to your net profit, increasing your qualifying income. These are known as 'add-backs'.

Understanding which expenses qualify is key to presenting your strongest financial profile. Common add-backs include:

Depreciation: This is the most common add-back. If you purchased a work vehicle or expensive equipment for your Houston-based business, you deduct a portion of its value each year. Since this isn't cash leaving your account annually, lenders can add it back to your income.
Depletion: Similar to depreciation, this applies to businesses that use natural resources. It’s a non-cash expense that can be added back.
Amortization: This is the practice of spreading the cost of an intangible asset (like a patent or trademark) over a period of time. This non-cash deduction can also be included in your qualifying income.
Business Use of Home: The deduction for a home office has specific rules, but often a portion can be added back.
One-Time Major Expenses: If you had a significant, non-recurring business expense in one year (for example, a complete office build-out), a lender may be willing to exclude it from the income calculation with proper documentation and a letter of explanation. (The data, information, or policy mentioned here may vary over time.)

Let’s say the Austin consultant from our earlier example had a $20,000 depreciation expense on new computer systems. A savvy lender can add that $20,000 back to their $90,000 net income, bringing their qualifying income up to $110,000. This simple adjustment significantly boosts their borrowing power.

Preparing Your Profit and Loss Statement for Underwriting

Your tax returns provide a historical view of your income, but what if your business is growing rapidly? A meticulously prepared Profit and Loss (P&L) statement is your most powerful tool for showing underwriters your current financial reality. This document bridges the gap between your last tax filing and your mortgage application.

A lender-ready P&L statement should be clear, detailed, and accurate. It must include:

Gross Revenue/Sales: A line-by-line breakdown of all income sources.
Cost of Goods Sold (if applicable): The direct costs associated with producing your goods.
Operating Expenses: A categorized list of all your business expenses (rent, marketing, salaries, utilities, etc.).
Net Income: The final profit figure after all expenses are subtracted from revenue.

This P&L should cover the period from the start of the year to the most recent month-end (YTD). Most importantly, it must align perfectly with your business bank statements. Underwriters will scrutinize these documents to verify the income and expenses you claim on the P&L. A well-organized P&L demonstrates professionalism and provides underwriters with the confidence they need to approve your loan.

Self-employed professional preparing financial documents for a mortgage application.

Consulting Your CPA Before Your Mortgage Application

Your Certified Public Accountant (CPA) is an invaluable asset in your business, and they should be your first call when you start thinking about buying a home. The conversation about mortgage planning should happen at least a year or two before you intend to apply, as tax strategies from previous years directly impact your qualification.

Your CPA and your mortgage strategist work as a team. While your CPA focuses on minimizing your tax burden, your mortgage professional focuses on maximizing your borrowing capacity. By bringing them together, you can create a balanced strategy.

Discuss these key questions with your CPA:

Based on my homebuying goals in Houston, how should we approach deductions for the current tax year?
Can you review the list of potential lender add-backs to ensure my tax returns are structured to highlight them?
Should I delay a major equipment purchase until after my home loan closes to avoid a large one-time expense on my P&L?

This proactive approach prevents surprises during underwriting. Your CPA can help prepare the necessary financial documents and provide a letter verifying your business's history and stability, which adds significant weight to your application.

Using Two Years of Tax Returns for an Accurate Income Picture

Lenders require at least a two-year history of self-employment to demonstrate stability. To calculate your qualifying income, they will typically average the net income from your two most recent tax returns. This method is designed to smooth out fluctuations and provide a reliable income figure.

How this average is calculated depends on your income trend:

Stable or Increasing Income: If your net income was $80,000 in year one and $90,000 in year two, the lender will average the two, resulting in a qualifying income of $85,000.
Decreasing Income: If your income dropped from $100,000 in year one to $75,000 in year two, this raises a red flag for underwriters. They will be conservative and use the lower, more recent figure of $75,000 as your qualifying income. You will need to provide a strong letter of explanation for the decline.

A consistent or upward income trend is ideal. If you know you plan to buy a home, you might strategically take fewer deductions in the two years leading up to your application to show a higher, more stable net income.

Proving Your Austin Business is Stable and Growing

In a competitive market like Austin, a robust and well-documented mortgage application is non-negotiable. For self-employed borrowers, proving business stability goes beyond tax returns. Underwriters need to see a healthy, ongoing enterprise. Be prepared to provide a comprehensive package of documentation, including:

Two Years of Personal and Business Tax Returns: All pages and all schedules must be included.
Year-to-Date Profit & Loss Statement: As discussed, this must be current and detailed.
Business Bank Statements: Typically, the most recent two to four months to verify the income on your P&L.
Business Licenses: Proof that your business is legitimate and in good standing.
A Letter from Your CPA: This letter should verify the date your business was established and confirm that you are still actively in operation.

Gathering these documents early in the process ensures a smoother underwriting experience and positions you as a strong, reliable borrower.

Home Loans That Do Not Require Tax Returns

What if your tax returns, even with add-backs, simply do not reflect your true income? For many successful entrepreneurs, this is a frustrating reality. Fortunately, a class of mortgage products known as Non-Qualified Mortgages (Non-QM) offers solutions that do not rely on tax returns.

Qualifying with Bank Statements

Bank statement loans are the most popular alternative for self-employed borrowers in Texas. Instead of looking at your tax returns, lenders analyze your business bank statements to determine your income and cash flow.

How it Works: The lender will review 12 or 24 months of business bank statements and use a formula to calculate a qualifying monthly income. For example, they might average your monthly deposits and apply an 'expense factor' (typically 30-50%) to arrive at a figure that represents your profit.
Who it's For: This is ideal for business owners in cities like Houston who have high revenue and consistent deposits but also have substantial tax deductions.
Considerations: Bank statement loans may require a larger down payment (often 10-20%) and have slightly higher interest rates compared to traditional loans, but they provide a direct path to homeownership based on your business's actual cash flow. (The data, information, or policy mentioned here may vary over time.)

A Texas home representing the goal for a self-employed homebuyer.

Using Assets to Qualify for a Mortgage

Also known as asset depletion or asset qualification loans, this option is for high-net-worth individuals with significant liquid assets. Lenders calculate a qualifying income by dividing your total verified assets by a set term, such as the 360 months of a 30-year mortgage. This is a niche product but serves as a viable alternative for borrowers who may have complex or irregular income but substantial wealth. (The data, information, or policy mentioned here may vary over time.)

Ready to see how your business's real financial strength translates into buying power? Take the first step toward securing your home loan by starting your application. Apply now to get a clear, personalized assessment.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.