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Self-empoyed Mortgage Penalty

Whether it was intended or not, it has become apparent that the government’s efforts to curb mortgage delinquency has resulted in difficulty for the self-employed to obtain mortgages. The government has mandated that the only income that can be considered for obtaining a mortgage must come from the “taxed” amount on the previous two(2) years of tax returns. So if I write off most of my income and do not take a full salary (i.e. reinvest earnings), then I cannot use any of that income (regardless of how significant) towards the purchase of a home.

So I happen to be one of the ones affected by this and am no longer able to use my business generated income towards my “ability to pay” numbers. This means that, unless I can afford to buy a home without a mortgage, my right to own a home has been -essentially- taken away.

This affects the following scenario:

  • Self employed or working for deferred income
  • Writes off a majority of income (i.e. shows little to no taxable income)
  • Not willing to overpay taxes (or not take deductions) just to buy a house

So while I don’t really get in to politics (because I think it’s all a show no matter who is the figurehead), I do think that recent changes to “help” the entrepreneur have done nothing to help me and now has hurt me in a huge way. In the end, it all just goes back to the sad fact that the buddy-buddy system is in full effect and I am nobody’s buddy. Oh well.


By Tony on July 12, 2011

Welcome back. Sucks about the mortgage. I had the same problem a few years ago when applying for car loans. I have an excellent accountant and I reinvest the majority of the income. Luckily I could save for the car, but a house is a different ball game.

By Brandon on July 22, 2011

Good to hear from you. Yeah, I didn’t realize it might also extend to car loans. Even better, right? lol

I should also mention for others that there is still, for the moment (as of 2011), a last resort loophole for the mortgage qualification problem. If you use any “Section 179” deductions (meaning you buy assets for business use and depreciate them in that year), then those also count in addition to your previous two(2) years average AGI.

So, for me, I tend to buy new computers in years where I make a lot of profit -instead of paying myself a salary- and that counts towards the AGI average but also gives me brand new machines to work with. I opt to take the full value of the purchase as a 179 deduction in that same year. My example may not work for everyone (since computers depreciate in value so quickly) but, in my case, new computers means I am more efficient and can [hopefully] make more money in the following year. 🙂

Even this lingering benefit may be ruined in the next few years. For someone (Obama) who claims to want to help the entrepreneurs, I -for one- certainly do NOT feel helped. While I’m not political and I couldn’t care less about who is president; what I do know is that I have been unable to get any of that “entrepreneur loan money” and all of the benefits of being self employed are being taken away. It begs the question: What is the real agenda at the top?

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