Posts Tagged home loan

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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Be prepared to get a mortgage loan

Getting a mortgage loan today is very different than it was just a few years ago when all you had to have was a job and a pulse, and the job was debatable if you had a good FICO score.  Those days are gone, and so are the State Income, No Doc, No Income No Asset, No Income Verified Asset loans and other low documentation required loans.

Today we’re back to “The 3 C’s of Lending”, also known as Credit, Capacity and Collateral.  This is proving to the lender that you have a good credit record of repaying other creditors, the capacity to repay the loan in the form of a steady job and sufficient income, and good collateral, equity in the house you are buying as well as other assets such as savings or liquid retirement funds should you become unemployed for a period of time.

The rule today is Full Doc loans, loans where employment, income and assets are verified at application –  and recently lenders are requiring them verified again within days before the closing date.

Underwriters are also being much pickier than they were in the past about following the rules to the letter because of new “buy-back” regulations where if a loan goes south in the first 12 months the lender has to buy the loan back from Fannie Mae or Freddie Mac, and the underwriter’s job could be on the line, also.

In preparation of this here are some things to get together or take care of before you go to apply for a mortgage loan, and very importantly, before you make an offer on a home.

Make sure your credit looks good

Make sure your credit looks good and that the lowest middle credit score (of Transunion, Equifax and Experian) is at least 620.  Sure VA doesn’t require a score and FHA states their minimum is 580, but it’s not their money being lent, it’s the money of the investors who own the banks, and those with the gold make the rules, and the rule today is they won’t lend to anyone with less than a 620 FICO score.

The issue here is that FHA and VA only guarantee a percentage of the loan (30% or less), they don’t make the loan or lend the money.   So even though FHA or VA says they’re okay with this or that, it doesn’t mean the investors lending their money to you will be. Investors don’t want to be left holding the bag to the tune of 70% to 80% of the amount loaned should the borrower default, either.

So months (not days or weeks) before you apply for a mortgage loan go online to AnnualCreditReport.com and get copies of your credit reports from the three reporting bureaus and make sure that there is not any inaccurate information on there.  The time to dispute legitimate problems on your credit report is not just days before applying for a loan, it’s months before because the process of disputing the records with the credit bureaus and the creditors is a slow and formidable one.

Get these items together before you see your loan officer

  • 2 most current years of tax returns, all schedules, W2′ and 1099’s
  • 2 most recent months bank statements for all checking and savings accounts held by the borrowers
  • 2 most recent paycheck stubs if an hourly or salaried employee
This is the minimum documentation needed from the borrower to submit a loan to underwriting.  You may need other proof of assets like 401K and other retirement or investment statements.  So you can see that you can’t just bring in one paycheck stub and expect the underwriters to tell you what additional items they want.  Underwriters will “suspend” a loan file (one step above denying it) for incompleteness. If they don’t suspend it they will make your life miserable because you made their life miserable; they will condition you all the way back to providing DNA from your great-great grandparents.  A well prepared, complete loan file goes a long ways toward making friends with a loan underwriter at a bank or lender and giving you a better chance of a quick and painless approval and closing.

VA Loans

If you are applying for a VA loan be sure you have your DD-214 handy and you’ve pulled your Certificate of Eligibility (COE) from the Veterans Information Portal. If this is a subsequent use of your VA benefits be sure you’re reinstated your benefit to full benefit status.  If you are a disabled veteran and eligible for waiving of the VA Funding Fee be sure you have your 26-8937 Verification of VA Benefits form from the VA.
Usually these forms are available in a few days via the VA Veterans Portal or fax, however not all VA records are currently available online and those could take a couple of weeks to procure.

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