Qualifying for home financing as a small-business owner

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When you’re buying a home, a basic rule of thumb is that your house payment shouldn’t be more than 36 percent of your income each month.

But if you’re self-employed, what number should you be looking at?

Basically, the bottom line.

When your home financing partner is considering your application, they’re not going to be looking at your gross income—the top line on your tax returns. Instead, they’ll be looking at net income after expenses are deducted—that notorious bottom line.

This especially impacts those who file Schedule C tax forms attached to personal tax returns, such as drivers and food truck owners who have many expenses to write off.

Also know that your home financing provider will not just be considering your most recent taxes. They’ll have to compare them with the previous year and use your average income over 24 months. If your income has declined, they’ll have to use the more recent—smaller—number.

One more tip: Stop and weigh the pros and cons before you write off your expenses. Those write-offs reduce your bottom line, and that can be a deal killer. Consider waiting to write off expenses until after you buy your house.