Why Write Offs Hurt Mortgage Approval: Self Employed Borrowers Beware!

Hey guys, welcome back to another week of Mortgage Matters in Minutes. Again, I'm your host Brent Rasmussen, owner of Mortgage Specialists. If you're enjoying these videos each and every week, please hit that subscribe button. Feel free to share these on your social media post to educate those that might be clients of yours that you yourself want to get information out to. especially today being that we many of us in this industry being self-employed know and run into some of these issues along the way. We're also always just a phone call away. feel free to reach out to us to ask any questions or have us speak with you directly or any of your clients. we would love to assist. And before we get started again, happy holidays. we have very much holiday season coming through. No matter what your religion or your beliefs, we want to wish you a happy holidays. So today, let's get ahead of 2026, which is coming down the line. And wrapping up 2025, let's talk about why write offs hurt your mortgage approval. And what we're talking about is self-employed individuals that take business expenses and write them off. And what do you mean by write them off? it means use them to lower your tax bill to the federal or state government there as well. So, a lot of individuals enjoy being self-employed because they're able to use a lot of expenses to write off and lower how much they paid to the government. Like if you are W2, you pay a standard amount whether they withhold federal and state. There's a formula for that. being self-employed, you're going to bring in revenue and then take expenses and minus those two out. That's what's going to be your income that we can use. So, a lot of times I can tell you business owners don't always pay attention to the tax returns that they are filed or their books or where money is being spent at and they supply that information to their tax preparer, their accountant, their CPA. And obviously many times the goal is to lower your taxable money. and so because of that, generally speaking, people are going to try to write off as much as they possibly can. So we as lenders are always going to use your tax returns to verify your income. And many times that can be delayed. So let's say right now you want to get approved for a loan, but 2025 taxes aren't filed. you had a great year in 2025, but we're not going to be able to use 2025's income until you go and get those tax returns filed. So, a lot of people think, well, what about using my bank statements or what about using deposits or what about looking at something different? Unfortunately, the rules are set very black and white in regards to what we can use and what we cannot use. There are different rules that are out there for using a bank statement loan. Those do not fall into the general conventional FHA VA loans, which are generally better interest rates, long-term fixed interest rate mortgages that exist out there. So, when we look and individuals talk to us, they generally do say, "Hey, you know, I make more money than what I'm reporting." We understand that. But because what happened in 2008 and prior, a lot of individuals got loans that they did not repay back. So the government FHFA who monitors Fanny and Freddy now oversee those rules and said no more of those types of financing. We got to use the tax returns to review the income that's needed. So if you bring in $200,000 but you have $150,000 in expenses, we're going to use that $50,000 for your income. A lot of people say, "Well, I made 200 grand." Well, unfortunately, those $150,000 of expenses are causing you to get approved for much less of a home than what you may be able to obviously by using that higher $200,000 amount. So, the typical write- offs that most business owners know about and see are writing off your vehicle, depreciating it, writing off mileages, you know, appointments, lunches, breakfast, meals, entertainment, things like that, using their home office at home. And then the biggest one is generally the section 179 deduction, which is usually computers and technology. You can depreciate right away the very first year you own or have purchased that equipment. and dollar for dollar can take that deduction right away. Then there's also one-time losses here and there. but generally those are the big terms that we see besides your normal everyday business marketing expenses, things that you use. And many times what we know and see is that people carry over their personal situations and make them business to kind of obviously lower their tax situations. So we talked a little bit about why this is. So what should we do? Honestly, looking at your tax returns is step number one. Understanding what lines are. Tax returns, yes, are very thick and a lot of pages, but generally speaking, we're only looking at one to seven pages out of that information. And those pages are very easy to read once someone sits down and explains this to you. And a lender can. We would love to sit down with individuals and show them here's how these numbers break out and here's what has been filed or your CPA, your accountant, your tax repairer can do that for you or do that afterwards with you. So, what we'd always suggest is that you talk with a lender first. We in the springtime talk with a lot of self-employed borrowers and review their taxes and explain to them what they may qualify before they even file their taxes because there's always going to be a balance here. We're not saying to not write off expenses, but we might needed to write off less expenses over a year or two to claim enough income to qualify for a home loan. So, that's the general juggling act that we want to see. And again, your CPA, your accountant, your tax preparer is going to have different goals than a mortgage lender is going to. And we understand that. We're not asking or wanting you to pay more in taxes. We're just telling you that the rules are this and we have to play by those rules. and we would love to look at your documentation a year or two years in advance to let you know what you may need to do to get in that qualification situation. So, always, always, always plan ahead. That's why we love to get information out there to educate you and others of what you need to do if you're a self-employed individual and you are taking lots of write-offs. So, you can plan ahead and we can give you strategies and you can choose to use those or you don't necessarily have to. So, we talked to a lot of individuals that want to continue filing the taxes the way they want and many times that makes them a little bit difficult to get a loan or not at all. So, I'm Bram Rasmussen, owner of Mortgage Specialists. Love to chat with you about any questions you may have. Feel free to call me at 402-991-5153. Check us out on our website mtg-specialists.com.

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