Divorce is a financial whirlwind, and if you’re a business owner, it’s like adding a complex equation to an already challenging situation. Qualifying for a mortgage with fluctuating income, tax deductions, and lender scrutiny can feel overwhelming. But it doesn’t have to.

As a Certified Divorce Lending Professional (CDLP) in Michigan, I specialize in helping self-employed individuals navigate these unique challenges. Let’s break down what you need to know to secure your financial future.

Why Lenders Look at Self-Employed Income Differently

Unlike W-2 employees, business owners face extra hurdles when it comes to mortgages. Here’s why:

1. Tax Deductions = Lower Qualifying Income:
   • Those smart business deductions? They also lower your taxable income, which is what lenders use to qualify you.
   • Example: $150k earnings – $60k deductions = $90k qualifying income.
2. Income Rollercoaster:
   • Lenders typically want two years of tax returns, which can be tough if your income varies.
   • Tip: Freddie Mac allows the most recent year if your business has been established for 5 years or more.
   • Example: Income trending upward vs. Income trending downward:

If a business owner earned $200,000 net income in 2023 and $120,000 net income in 2022, lenders may average the two years at $160,000, even if income is trending upward. If the net income is declining from year to year, $200,000 in 2022 but only $120,000 in 2023, lenders will use the $120,000 only because it is the most recent year and the lower of the two years.

3. New Business Blues:
   • Most lenders require at least two years of self-employment history.
   • Exception: If you transitioned from a similar W-2 job, one year might be acceptable.
4. DTI Dilemmas:
   • Business-related debt can inflate your debt-to-income ratio (DTI).
   • Good News: Business debts on your personal credit report can sometimes be excluded if you prove they’ve been paid by the business for 12+ months.
5. Divorce Drama:
   • If your business is a marital asset, legal disputes can delay your mortgage.

Decoding the Lender’s Language: How They Calculate Your Income

Lenders dig deep into your financial records. Here’s what they look for:

• Tax Returns: Form 1040, Schedule C, K-1, and corporate tax returns (if applicable).
• Profit & Loss (P&L) Statements: To verify current income trends.
• Bank Statements: 12-24 months to check cash flow.

Your Mortgage Game Plan: Strategies for Success

1. Partner with a CDLP:
   • We understand both mortgages and divorce finances.
   • We can help structure settlements for mortgage qualification.
2. Strategic Deductions:
   • If you’re planning to buy a home, consider limiting deductions for a couple of years beforehand.
3. Paperwork Power:
   • Be prepared to provide P&L statements, bank statements, and CPA letters.
4. Explore Alternative Loans:
   • Bank statement loans, DSCR loans, and Non-QM loans can be lifesavers.
5. Down Payment Prep:
   • A larger down payment (15-20%) can boost your approval chances.
6. Refinance Smart:
   • Ensure support or business income meets lender guidelines before refinancing.

Real Success: A Birmingham, MI Story

A marketing consultant faced challenges with low taxable income, limited self-employment history, and support that was not received long enough to be qualified income. As her CDLP, I:

• Secured her a Non-QM bank statement loan to overcome the low income and allow her to purchase a new home shortly after her divorce was finalized.
• Helped her plan for a 20% down payment to reduce the overall loan risk.
• Ensured her settlement met conventional loan requirements so she could refinance in the not-too-distant future.

She closed on her home within 75 days and later refinanced into a conventional loan.

Your Next Steps

For Business Owners:

Don’t let self-employment complicate your homeownership goals. Let’s create a tailored mortgage plan. Contact me for a free consultation.

For Family Law Professionals:

Partner with a CDLP to guide your self-employed clients through the mortgage process. Let’s collaborate!