Archive for category Mortgage

Commission Income and Mortgages

Many people earn part or all of their income from commissions. Commission income is permissible for mortgage loan qualification if a few requirements are met.

Generally, Conventional, FHA and VA loans require that the applicant have received the commission income for at least two years. The amount of income used to qualify will be based on an average of the past two years of commissions. Commission income should for the most part also show increases from year to year.

There are some borrowers that will qualify with less than the two years of commission income. These would be people that work for a company on a regular basis, but get paid piece work; such as auto mechanics, auto body repair technicians, medical billing transcribers and others that work a steady job for a company, but that company has chosen to treat their employees as private contractors. In such cases less than two years of commission income is permissible, however there must be at least twelve (12) months of commission income and a year of tax returns filed with commission income.

It is by no means a deal-killer if you’ve recently gone from being W-2’d to 1099’d, but you do have to have received 1099 income for at least twelve (12) months and filed tax returns with such before it can be counted as qualifying income for a mortgage loan, and must be documentable as continuing in the future.

As always, don’t hesitate to contact me with any questions you may have.

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Investors part of sinking home prices

According to Campbell Surveys, 47 percent of all home sales currently are on distressed properties. A distressed property is one that is either in the foreclosure process or has been foreclosed on. Homeowners executing a pre-foreclosure sale and banks prefer the quick cash of an investor to waiting 30 to 45 days (or longer if the borrower applied for a loan through a bank) for a buyer using financing to buy the home. Investors bought 23% of all homes sold in the past year, 3 out of 4 of them paying cash. This is causing downward pressure on home prices since investors with cash are typically paying 10 to 20 percent less than someone who would by the house as a primary residence, and cash-in-hand right now speaks loud to someone facing foreclosure.

Is this a concern? I think it is right now, but, those homes being bought by investors now will be resold at or near market price, usually within 6 months of being bought by the investor. So the market will correct itself, it will just take a bit longer. And being full-value sales home values may increase faster than we think.

If this shows anything, it’s if you are looking to take advantage of a foreclosed home, or one in foreclosure or being sold as a short-sale, have your ducks in a row and have your financing in place before you place an offer. If everything except the appraisal and title work has been done a purchase loan can usually be closed in 14 days or less.

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Self-employed income and buying a home

In the last four years we’ve seen many that have lost their jobs starting their own businesses. Of course, with being self-employed there comes that extra “self-employment” tax, so it can be very appealing to the small business owner to not claim income earned in cash rather than check or credit. In fact, I’ve seen many service businesses that offer discounts to their customers for cash rather than credit card or check because what doesn’t go through their bank accounts didn’t really happen, right?

The problem with this is that when it comes to getting a mortgage loan to refinance or buy a home, it’s what’s on the tax returns that qualifies the borrower for the loan. Cash not disclosed to the IRS can’t be used because it can’t be proved.

Another common method used to reduce the tax liability of the self-employed is to write-off as many expenses as possible as businesses expenses. While this may reduce the small business owner’s tax liability, qualifying for a mortgage loan is based on the taxable income reported on Line 31 of the Schedule C form, not the gross amount on Line 7.

This does put the self-employed borrower at a disadvantage compared to w W-2’d borrower, especially if they have a home office since many items that are paid also by a W-2’s borrower (cell phone, land line, internet, auto leases, etc.) is expensed by the self-employed, and thus reduces their taxable income even though both borrowers pay the same for those monthly expenses.

I’ve had many clients here in Utah that legitimately made good money, but to minimize taxes itemized themselves down to almost no income. Sure is was a great idea at first, but now they don’t qualify for anywhere near the quality of home they can actually afford.

The solution? Report fairly and accurately on your taxes. It hurts in the pocket book a bit, but when the time comes to prove your income to buy a home, you’ll be glad you did. Talk to an accountant or other tax professional to get good advice on how to maximize your income and minimize your taxes.

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