Mortgage lenders reduce qualifying income when self-employed borrowers claim tax deductions

Self-employed people face a difficult choice when they want to buy a home. Banks use net income to decide how much someone can borrow. Net income is what you earn after subtracting business costs. The problem is that claiming more business expenses lowers your tax bill, but it also lowers your net income. Lenders look at the average net income from the last two tax returns. So years of smart tax planning can make it harder to qualify for a mortgage. Some self-employed borrowers claim fewer deductions before applying, which means they pay more tax but show higher income. Others choose a non-qualified mortgage, which has more flexible rules but usually comes with a higher interest rate.