If you are self-employed you know the drill. You work hard, take care of your customers, pay your bills and try to keep as much of your money as possible. When tax time rolls around, you sit down with your accountant and look for every legal way to lower your taxable income.  It makes sense. Why pay more tax than you have to? But there is a catch that many business owners do not think about until they are ready to buy a home. The same tax returns that help you save money can make it harder to qualify for a mortgage. I have seen this issue come up time and again with self-employed buyers. They run good businesses, have money in the bank and can easily afford the monthly mortgage payment. Yet, when a traditional lender reviews their tax returns, the income on paper may be too low to qualify. The good news is that there are options. The important thing is to understand them before you start shopping for a home. Not all mortgage lenders see income the same way. When most banks review a mortgage application, they want to see your personal tax returns, Notices of Assessment and other records. They usually focus on the income you report after business expenses, not the total amount your business brings in. For a self-employed person, that number can be misleading. Take a contractor who brings in $180,000 a year but claims business expenses that leave $65,000 in taxable income. The contractor may have plenty of cash to cover a mortgage payment, but the bank may qualify them using a much lower income figure. That does not mean the bank is wrong. It means the bank is working with the numbers it can prove. The key is knowing that traditional banks are not the only option. Some mortgage programs are designed specifically for people who own businesses and do not show their full earning power on a tax return. Option 1: Insured Stated-Income Mortgages One option worth exploring is an insured mortgage program for self-employed buyers. These programs may allow a lender to use a reasonable estimate of business income, supported by other records, instead of relying only on the income shown on personal tax returns. Despite the name, “stated income” does not mean you can pick a number out of thin air. The lender and mortgage insurer still need to see that your income makes sense for your type of business. They may look at how long you have been in business, your bank statements, business revenue, credit history and the size of your down payment. Some programs also allow certain business expenses to be added back when calculating qualifying income. The big advantage is that you may be able to get a mortgage through a traditional lender without paying the higher rates and fees that often come with alternative financing. There are limits, of course. Not every business or borrower will qualify, and the lender must follow the insurer's rules. You should also expect to provide paperwork to support your application. Still, this is often one of the first options I would investigate for a self-employed buyer who wants to keep borrowing costs down. Option 2: Alternative Lenders and Bank Statement Programs What happens when your tax returns do not work, and an insured program is not a fit? This is where alternative lenders can help. These lenders often look beyond your personal tax return and take a closer look at how money moves through your business. One approach is a bank statement program. The lender may review six to 12 months of business bank statements to see how much money comes in. It then estimates how much of that money is available to support your mortgage payment after business expenses. For example, imagine a business has $240,000 in deposits over a year. A lender might apply an expense allowance based on the type of business and use the remaining amount to estimate qualifying income. The actual calculation varies by lender, and not every dollar deposited counts as income. A lender will also want to understand where the money comes from. Transfers between accounts, borrowed funds and other deposits that do not come from business sales may not count. The advantage is simple: the lender can get a better picture of your business cash flow, even if your taxable income is low. The downside is the cost. Alternative mortgages often come with higher interest rates, lender fees and stricter rules about the down payment. Depending on the lender and your situation, you may also have fewer mortgage products to choose from. These mortgages can make sense when they help you buy a home you can comfortably afford. But they should be chosen with a plan, not simply because they are the easiest approval to get. The tax savings versus mortgage costs is where things get interesting. Most business owners want to reduce their tax bill. That is understandable, and there is nothing wrong with claiming legitimate business expenses. The problem comes when tax savings today create a bigger financing cost tomorrow. But here is something many self-employed buyers overlook: paying more income tax just to qualify for a traditional mortgage is not always the best financial move. Let's say you save several thousand dollars in income tax by claiming legitimate business expenses. A year or two later, you want to buy a home, but your reported income is too low to qualify with a regular bank. You may now need an alternative mortgage with a slightly higher rate and an upfront lender fee. At first, that might sound like a bad deal. But when you compare the actual costs, it may be the better option. Consider a $600,000 mortgage. If an alternative lender charges an interest rate just one percentage point higher than a traditional lender, the difference would be about $6,000 in interest over a year if the full balance stayed at $600,000. In practice, the difference will change as you make payments and your mortgage balance declines. Now compare that cost with the extra income tax you might pay by reporting a higher taxable income. Depending on your business expenses, tax bracket and province, the additional tax bill could be substantial. You could end up paying more in taxes than you would have spent on the higher mortgage rate and lender fees. Of course, you need to run the numbers carefully. Alternative mortgages can come with lender fees, legal costs and penalties if you refinance too soon. The rate difference may also change over time, and there is no guarantee that you will qualify for a traditional mortgage later. The point is that paying more tax is not automatically cheaper than paying a little more for your mortgage. In some cases, keeping your legitimate business deductions and using an alternative lender can leave you in a stronger financial position. The best approach is to compare both options before making a decision. Ask your accountant to estimate the extra tax you would pay if you reported more income. Then ask your mortgage broker to calculate the full cost of an alternative mortgage, including interest, fees and any expected refinancing costs. You may find that paying a modest premium for your mortgage is a better deal than giving up valuable tax deductions. The goal is not to avoid taxes at all costs, nor is it to qualify for a mortgage at any cost. It is to look at the whole picture and choose the option that leaves more money in your pocket over time. If buying a home is on your radar in the next one to three years, it is worth having a conversation with both your accountant and a mortgage broker before making major decisions about how you report your income. Ask your accountant to explain the tax savings from your current approach. Then ask a mortgage broker to estimate what you could qualify for under different lending options. You may discover that a traditional mortgage is still within reach. Some lenders can make reasonable adjustments for certain business expenses, and insured self-employed programs may offer more flexibility than you expect. If those options do not work, a bank statement mortgage may be a sensible short-term solution. In that case, ask what it would take to move to a lower-cost mortgage later. That could mean building a stronger income history, improving credit, paying down debt or waiting until your tax returns better support the mortgage you need. Most importantly, do not wait until you have found your dream home to start figuring this out. The bottom line is that being self-employed should not mean you have to pay more for a mortgage than necessary. But the way you manage your business finances can affect the choices available to you when it is time to buy a home. Saving tax is important. So is keeping your financing costs under control. The goal is not to pay the most tax or the least tax. It is to make informed decisions that work for your business today and your plans for tomorrow. A little planning can make a big difference. And when it comes to buying a home, knowing your options before you need them is one of the smartest moves a business owner can make. Important note: Mortgage programs, insurer rules, rates and fees change from time to time. This column is for general information, not personal tax or mortgage advice. Confirm current program requirements with your licensed mortgage professional and discuss tax decisions with your accountant.