Question: I am self-employed and have a great tax preparer. My consulting business grosses over $100,000 per year and I am able to deduct $70,000 in business expenses. This is great because I am in a low tax bracket but I'm running into trouble refinancing my house. Because my business expenses are so high, the lender doesn't want to approve my loan because my income is so low on paper. I have perfect credit, my loan balance is $160,000 and my property is worth at least $250,000. Don't lenders know that the self-employed are able to write off quite a bit of their income?

Answer: Yes, lenders are indeed aware that self-employed borrowers often claim whatever expenses they can in order to minimize their tax burden. But mortgage underwriters also adhere to what I like to call "parallel disclosure". This means you have to be consistent when disclosing your financial status to your mortgage banker and the Internal Revenue Service.

You're self-employed. You don't want to pay taxes. And you grossed over $100,000 last year. Fantastic. You're clearly doing well for yourself and the lender should understand that.

But now let us jump into the shoes of the IRS examiner. He sees that you have deducted perhaps $10,000 in mortgage interest paid last year. He also sees that you paid perhaps $2,500 is real estate taxes. I haven't seen your tax returns, but I would guess that you were able to deduct a few other expenses not associated with your consulting business.

Then the IRS agent sees that you grossed over $100,000 in consulting fees and deducted $70,000 in business expenses. You're telling the IRS that you made a hundred grand last year, and $70,000 was spent to make the hundred grand. That leaves you with $30,000 to live on.

$12,500 of that thirty grand paid for real estate taxes and mortgage interest. That leaves you with $17,500 to live on. Not so good from the IRS's eyes. In fact, you're in a very low tax bracket because you can hardly make ends meet on only $17,500. So the IRS gives you a very modest tax bill. After all, you're poor.

Yup. I'd say you have a great tax preparer. Let's hope your expenses are well documented.

Now let's talk about "parallel disclosure". You can't tell the mortgage underwriter that you make $100,000 per year and tell the IRS agent you made $30,000 in the same year. This is why you're having trouble with the lender.

But enough of the lecture. Let me make a couple of suggestions that may help you refinance your house.

The first thing to do is see if you can achieve and "Accept Plus" under Freddie Mac's Automated Underwriting (AU) system. The Federal Home Loan Mortgage Corporation, or "Freddie Mac", offers a computerized underwriting system that will enable a lender to render a decision in minutes. Depending on the strength of the file, AU will categorize the application as an "Accept" a "Caution" or an "Accept Plus".

An application with an Accept Plus status allows a "stated income" underwriting. This means that your income does not need to be verified. Since you have $90,000 in equity and you say your credit is perfect, you might receive an Accept Plus on the AU system. Be sure to ask your loan officer about this.

If that doesn't work, ask your loan officer about another "stated income" program. You may have to pay a slightly higher rate but a good loan officer should be able to run the numbers and ensure that refinancing still makes sense.

Published: July 9, 2003

Use of this article without permission is a violation of federal copyright laws.

, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.