Many self-employed clients are under the impression that getting a mortgage with their type of income is complicated, or perhaps even impossible. While it's true that most banks find it much easier to work with clients who are employees, there's a whole plethora of ways to document your income as a self-employed person. And in my experience, almost every entrepreneur can find an option that works best for them. However, it often requires some preparation, sometimes even several months in advance.
The Most Common Route: The Tax Return
Almost every entrepreneur is familiar with documenting income using a tax return. Along with proof of filing and confirmation of tax payment, it's the most common method. Usually, you submit the return for the most recent tax period, though some banks may ask for the last two. It depends on the specific bank and the size of the loan you're applying for.
When using a tax return, the key factor is how you claim your expenses. There are two main ways to do this:
1. Lump-Sum Expense Deduction
For the same tax burden, using a lump-sum expense deduction looks much better for mortgage purposes than claiming actual expenses. Why? Because banks assume that the flat rate allowed by law (e.g., 60% of turnover for most industries) doesn't correspond to your actual costs. They know that an entrepreneur using it often has real business expenses that are significantly lower.
Therefore, each bank uses its own coefficient to recalculate this lump sum and, for the purpose of determining your recognized income, will increase your net income above what would be calculated purely from your tax base. This coefficient varies not only from bank to bank but also depending on your specific field of business.
For example, it's obvious that a client in the IT field, like a programmer, will likely have lower actual expenses than a real estate agent, even though both can claim the same 60% flat-rate deduction. Some banks recognize this and might reduce the programmer's expenses to just 30% for their income calculation, while for the real estate agent, it might be 50% instead of the full 60%.
2. Actual Expenses (Tax Records)
If you keep detailed tax records or use full accounting, the situation is different. In that case, your tax return shows your actual profit. This clearly states how much you've earned, and the bank simply won't recognize any income beyond that figure.
A Modern Approach: The Flat-Rate Tax
Under the very popular flat-rate tax regime, you don't file a tax return at all, so it obviously can't be used. This leaves banks with no choice but to look at your bank statements. They'll look for your business turnover on them and then proceed in a similar way as if that turnover was declared on a tax return using a lump-sum expense deduction.
The number of statements you need to provide varies. Most often, it's 12 months covering the last tax period, but more lenient options exist—for example, the last six or even just the last three months. This is often preferable because it reflects your more recent financial history. If the assessment period is only three months, you can even wait for a stronger quarter when your income will look better for your mortgage application.
Perks for Certain Professions
Among the self-employed, clients in so-called "preferred professions" have it the best. This group includes lawyers, architects, doctors, as well as IT professionals and other highly skilled specialists. They often get a few extra perks.
For example, their income calculation might come out a bit more favorably than for others, even with the same documentation. Plus, they can often document their income using just bank statements, even if they file a standard tax return.
A Nifty Little Market Quirk
There's one very interesting option out there. If at least 80% of your income comes from two main clients, you can also prove your income using only bank statements. It doesn't matter what industry you're in or whether you file a standard tax return. It's a handy little quirk of the mortgage market.
The Most Lenient Option for Everyone: The Pre-Approved Installment
Finally, there's one more option available to everyone—both self-employed individuals and employees. One bank offers what's called a "pre-approved installment." In this case, the bank assesses your payment capacity and ability to make payments based solely on your activity in your checking account. I'd say it's one of the most lenient income assessment methods out there. The big advantage is that you can get a mortgage of up to 15 million crowns this way.
Don't Be Discouraged
To sum it up, as a self-employed person, you have quite a few options, even if not every bank will get where you're coming from. If you're self-employed and running into a brick wall at your local bank branch, get in touch with me. We'll take a look at your numbers and figure out the best way forward together.
