Since lawyers and attorneys are two of the more unlikely groups of my clients, I decided to write a specialized article for you regarding assessing your income for a mortgage and ways to significantly improve your prospects.
However, the following lines do not necessarily apply only to these professions, but the principles below can be applied not only to mortgages for IT specialists and lawyers, but also to marketers, architects, doctors, notaries, tax advisors, forensic experts, interpreters and others…
Let’s start by saying that a mortgage for these occupations is assessed in the same way as any other. The difference is that we’re trying to convince the bank to accept higher income than under the standard methodology. The basic basis will certainly be the tax return, ideally for the last 2-3 tax years. We will always start from the tax return and then there are several options from where to do this.
Method of increasing deductible income by reducing flat-rate expenses
This method is definitely the easiest to pass. It applies to self-employed persons who claim 40% or 60% flat-rate expenditure. Many banks already provide for some internal adjustment of this expense lump sum in their methodology. For example, an IT specialist claiming flat-rate expenses of 60% of his income will have only the remaining 40% of his income counted for Bank A, but for Bank B, thanks to an internal adjustment, 60% of the total turnover will be counted as income (line 101 of the tax return) and for Bank C even 70%. The result is then reduced by levies and tax and we have the amount of deductible income.
However, if the standard methodology and the right choice of bank are still not enough to achieve the necessary income to obtain a mortgage, we need to go further. The path leads through an affidavit of real costs. And here lies the reason why this is the ideal mortgage procedure for IT specialists or lawyers.
Example from practice
Patrik is an IT specialist. Almost all of his earnings come from working with one company, which also allows him to work on its premises and use all its facilities. This is not unusual in this industry. However, Patrik and Adéla already had one mortgage for an apartment and then they liked the family house. The plan was that they would move out of the apartment and into the house, but keep the apartment and rent it out, which would leave them with the original mortgage. And here we were already over the edge with revenue. So we freely wrote an affidavit that Patrick’s real costs are quite minimal (computer, phone, commuting, …). The bank subsequently acknowledged the adjustment of the calculation, counting only 20% of the turnover as costs.
This was then supplemented by an expert’s report on the income from the future rental of the apartment and the mortgage was approved.
Method of increasing income by substantiating increased invoicing
We will use this method especially if your income from last year’s tax return is not sufficient, but you are already invoicing a sufficient amount this year.
Example from practice
Martin worked with a law firm in 2020 and his income for the year was CZK 1,200,000. In 2021, however, he was offered a more financially interesting cooperation with another law firm. However, Martin combined the transition with a 4-month vacation. However, this did not quite meet the intention of taking out a large mortgage in 2022, as Martin only invoiced CZK 750,000 for 2021.
Our solution was to document our billing from the beginning of our cooperation with the new law firm (from 10/2021 to 4/2022), which averaged 145,000 CZK per month, and to support this with bank statements showing the amounts received. We subsequently asked the bank to recalculate the 2021 tax return along the lines as if it had invoiced the whole of 2021 for this amount. The bank then recognized the higher income, which was sufficient to obtain a loan for their new family home just outside Prague.
Recognition method 70% of income from turnover according to bank statements
Only a minimum number of banks in the Czech Republic can meaningfully recognise income from turnover. However, for entrepreneurs with high turnover and high costs, the calculation of income by turnover makes a lot of sense. In addition, here we will discuss an alternative method where income is calculated from income according to bank statements. It should be mentioned here that the approver always has the right not to approve such a procedure if he/she does not like something.
Example from practice
Lenka and her husband earn their living as dental technicians. They work with dentists, to whom they supply dental products. They have high incomes coupled with high costs for materials and machinery. In addition, Lenka’s husband is her co-worker, which is advantageous from a tax perspective, but not from the point of view of the amount of deductible income for the mortgage (the husband claims flat costs for his part of the income).
However, they have been doing well in recent months, which has played into the hands of the alternative income recognition according to bank statements. We have provided 6 recent bank statements. The credits exclude transfers between own accounts and cash deposits and then deduct social, health and tax costs from the resulting income. Thus, we achieved a significantly higher income than by simply calculating the income from the tax base and a mortgage for a sufficient amount was in the world.
Prepare your documents
At the moment when we want the bank to acknowledge something extra, it is necessary to remember that the bank must then be able to justify such a procedure to the CNB. Thus, the more evidence we can use to support our claims, the better. As a recurring one I can mention:
- an affidavit – explaining why we want to recognise lower costs or higher income, what they are, etc. + signature of the applicant
- tax returns – ideally for 2-3 years
- Invoice list from the beginning of the previous year to today + corresponding bank statements
- cooperation agreement with the main customer
The above-mentioned documents are mainly used to prove the facts that we state as the basis for the methodological exception. It is also important to think about demonstrating the sustainability of the income. If, for example, there is a guaranteed man -days document or other agreement specifying a minimum amount of work or billing, it is appropriate to provide this to the mortgage approver for review. Women on maternity or parental leave are also often forgotten. They are expected to have a higher income when they return to work, and this is a big argument for the sustainability of household income, which can be easily substantiated by, for example, a work contract and a few bank statements from before the maternity leave.
Each such case is individual and the necessary supporting documents will vary. However, as long as we don’t make crap up, we are always able to easily provide the necessary evidence.
Each bank has its own mortgage approval methodology. However, it is often possible to bend it slightly here and there. You just need to know which bank to choose in a given case and where the imaginary boundaries are.
And if you have found or found yourself in the lines above, drop me a line and I’ll be happy to see what your options are.