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Secure A Mortgage

Posted by  on Apr 16, 2009
 
If you are trying to secure a mortgage for a real estate transaction, you will find that it can be challenging. However, being self-employed can initiate a set of factors that may affect your ability to borrow. Lenders define “self-employed” differently than the IRS or most of us would, it makes sense to spell out the characteristics at the outset of this article. Keep in mind that lenders are most concerned about a borrower’s ability to maintain a certain level of income and self-employed borrowers many times have the ability to modify their income based on certain factors within their control.

Loan underwriters have the discretion to evaluate each case on its own merits. Why is this significant? The biggest point is in the documentation requirements. Usually, a borrower would provide two years W-2 and thirty days pay stubs to prove income. However, a self-employed borrower will need to provide two-year personal tax returns and possibly business tax returns along with a current income statement for the business. This is to ensure current income is ongoing and is in line with prior year’s income.

People often ask why they need to give you my tax returns. I get a W-2 from my company? Well, the answer is that if you own 25% or more of your company, you are deemed to have the ability to change your income for any reason, and one reason may be to qualify for a loan.

Another common problem is with fully commissioned sales reps where they earn a strong income on their W-2 but upon review of their tax returns, they reflect a significant amount of un-reimbursed business expenses. These expenses are borne by the borrower during the normal course of their business, but are not reimbursed by their employer. A few examples of this may be vehicle expenses, travel and entertainment or supplies. Underwriters will deduct the full amount of these expenses from the reported income and can kill the deal very quickly if it affects the ratios to a level that does not meet the loan’s program guidelines.

Other factors that may affect the loan are passing through losses from various business schedules to your personal tax return, like a K-1 or Schedule E. Once again, these items are deducted from reported income and will reduce the income used to qualify for the loan. Non-cash items, such as depreciation and amortization are added back to income. Of course, if there are profits that are passed through, they will increase the borrower’s income. This is why a careful analysis of the entire picture is required to evaluate the borrower’s profile.

It is true that a full documentation, but loan will provide the best interest rate, in many cases, it may make sense to avoid all the complications by applying for a stated income loan. This type of loan allows the borrower to state the amount of income he or she makes. The income is not verified and therefore, there is no need to document it. This type of program is available for a slight premium added to the interest rate, depending on the borrower’s overall credit profile. One other option might be light income verification, which simply uses bank statement deposits over a certain period, such as 12 or 24 months. Other verifications would still be necessary, such as employment and verification of assets.

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