Running your own business in Texas and buying a first home

Two Texas business owners, one question

Meet two buyers. Their figures are illustrative, but the setups are common in Texas.

Marcus runs a three-person roofing crew in Tarrant County. Hail season keeps him busy, and he files a Schedule C. Last year he grossed $210,000. After materials, labor, truck costs and equipment depreciation, his return shows $64,000 in net profit.

Dee is an owner-operator hotshot driver hauling oilfield equipment out of Midland. She formed a single-member LLC and also files Schedule C. She grossed $150,000, but fuel, insurance, maintenance and depreciation on her truck and trailer brought net profit to $48,000.

Both want to buy their first home. Both will be underwritten as self-employed. And both will learn that the gross number doesn't matter much.

Step one: how the lender rebuilds your income

The lender starts with net profit, then adds back expenses that didn't cost you cash that year. On a Schedule C, FHA and Fannie Mae add back depreciation, depletion, amortization, casualty losses and business use of your home. Freddie Mac adds back non-cash items and nonrecurring losses.

Then it averages. Here's Marcus:

Marcus, roofing (example figures)	Two years ago	Last year
Net profit	$58,000	$64,000
Depreciation added back	$9,000	$11,000
Adjusted income	$67,000	$75,000
2-year average	$71,000 ($5,917/mo)
FHA uses the lesser of the average or last year	$5,917/mo

Rising income helps Marcus. Now Dee, whose last year was slower:

Dee, hotshot hauling (example figures)	Two years ago	Last year
Net profit	$56,000	$48,000
Depreciation added back	$14,000	$14,000
Adjusted income	$70,000	$62,000
2-year average	$66,000 ($5,500/mo)
FHA uses the lesser	$62,000 ($5,167/mo)

Dee's drop is about 11%. FHA's automated system sends a file to manual underwriting when self-employment income falls more than 20%, so she's under that line, but the lender will still ask why. Fannie Mae requires a trend analysis, and Freddie Mac makes the lender justify that a big change will hold for three years. A letter explaining a slow quarter in the oil patch helps.

Step two: the paperwork

• Personal returns: two years, signed, every schedule. The lender has you sign IRS Form 4506-C to pull transcripts.
• Business returns: two years if you file a 1065 or 1120S. FHA can skip them if your personal returns show rising income and closing money isn't coming from business accounts.
• Year-to-date profit and loss: FHA wants one once more than a calendar quarter has passed since your tax year ended. Schedule C filers don't need a balance sheet.
• Proof the business exists: Freddie Mac wants third-party verification that the business is operating, dated within 120 days of closing. Ask your lender which documents it accepts.
• The five-year shortcut: if you've owned at least 25% of the same business for five years, Fannie Mae and Freddie Mac can work from one year of returns.

Step three: the clock

Two years is the standard. Each agency allows less only when you came from the same kind of work:

• FHA: 1 to 2 years can work if you spent at least 2 years before that in the same or a related field. A roofer who worked for another roofing company before going solo fits that pattern.
• Fannie Mae: under 2 years needs a full 12 months on your latest signed returns and prior income at the same or higher level in a similar field.
• Freddie Mac: a combined 2-year history of the business and your prior job in the field, with at least one year of self-employment on your returns.
• VA and USDA: ask the lender for their self-employment rules.

Who's self-employed? FHA, Fannie Mae and Freddie Mac all draw the line at owning 25% or more of a business.

Step four: which Texas programs fit

Program	Open to business owners?
TSAHC Home Sweet Texas	Yes. Any job, income limit up to 150% AMFI by county, up to 5% as a grant or 3-year forgivable loan.
TDHCA My First Texas Home	Yes, for first-time buyers. County income and price limits apply.
TDHCA My Choice Texas Home	Yes. No first-time requirement.
City programs (Austin, Dallas, Fort Worth, San Antonio, El Paso)	Yes, if household income fits, often 80% of AMI.
Homes for Texas Heroes	Only through a listed full-time public job or the veterans category, not through the business.

Here's a quirk that helps business owners: lower taxable profit can put you under a city program's income cap. Dee's $62,000 qualifying income could fit Fort Worth's HAP limit of $88,250 for a family of four, if she buys inside Fort Worth city limits. It's a trade-off, though, because lower income also means a smaller loan. See the full list of Texas programs.

Step five: bank-statement loans and why they rarely mix with state help

Federal lending rules let lenders verify income with financial institution records, which is how bank-statement mortgages work. They're usually non-QM loans and can help an owner whose write-offs make tax returns look thin.

The trade: TSAHC and TDHCA attach their assistance to their own FHA, VA, USDA or conventional first loans. State housing programs generally need one of those agency loans, so a bank-statement loan usually means giving up the 5%. Have a lender price both: the agency loan with help, and the bank-statement loan without it.

The mixed household

Plenty of Texas homes have one W-2 and one 1099. Say Marcus is married to a fourth-grade teacher. She can be the Heroes borrower on her own. For TSAHC's non-bond help without the tax credit, only the borrower's own qualifying income counts toward the Heroes limit, so Marcus's roofing income doesn't push her over. City programs usually count the whole household.

Adding Marcus to the loan adds his income, but only after it clears the history and paperwork rules above. Ask the lender to run it both ways.

Before you file your next return

1. Talk to your tax preparer about the trade-off between write-offs and qualifying income.
2. Separate business and personal bank accounts.
3. Avoid big unexplained deposits in the months before you apply.
4. Keep your licenses, insurance certificates and a CPA contact handy.
5. Check your county's numbers on the income limits page.
6. Take a homebuyer education course; both state agencies require one before closing.

Then check your eligibility and ask for a loan officer who closes self-employed files with Texas programs.

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