Reporting income to qualify for a mortgage

Brad,

This is one of the key topics Betsy Moore and I want to discuss next month at a Biznik event we're planning. There's a fine line that has to be walked when considering a home purchase as a self-employed person, and we want to share our knowledge with the Biznik community. We should have everything finalized and an announcement up on the event board within days.

Sorry for hijacking the thread - but my hope is we can get a few people together and provide some guidance for those looking to purchase a home.

It's tempting to not report income but I have found life is a whole lot simpler when I do. Am I happy about it? No, I'd like to just tuck the money away out of sight... what I do now is look for ways to offset income with expenses. I'd rather put effort into that than into trying to keep all of stories straight. Best, Karen

My husband and I are both self employed and I am very curious about landing a home loan. Please let me know when your seminar/meeting takes place. I also would like to know a good lender for self employed people.

Hi Lisa: It's still possible to get a home loan. The key is to have a great credit score and be able to show that you've been in the same line of work for the last 2 years or more. It's also a plus if you have money put away. Generally, a mortgage broker is probably going to be better able to get you the loan you're looking for as opposed to a bank. The key is to fully document all your income. I hope this helps. Feel free to contact me if you have any other questions.

Paul

I have run into several clients I was training in how to use QuickBooks with this issue of reporting versus not reporting certain types of income and have run into it myself.

I tell people that you never know when you will need a home loan and will need all your income to qualify. It seems to be coming true now with the way the market is changing.

Several months ago, my blog mentioned the importance of reporting and paying B&O taxes on barter income.

It has been my experience that this type of (barter) income can be counted as well (for mortgage purposes) as it is a form of documented income.

However, as someone who is currently in the market as a first time home buyer (with a high 700 credit score, and putting more than 20% down), I don't agree with Paul's assertion that a mortgage broker is probably going to be better able to get you a loan.

It has been my experience that one bank qualified me for X amount, another bank was willing to do X plus 50% and a mortgage broker was in the middle (X plus 25%.)

There are also the issues of am I getting the par rate of interest, yield spread premiums (extra compensation paid to the broker from the lender and not always openly disclosed and ultimately paid by the borrower) and who the broker is really working for and who their fiduciary duty is towards.

Your mileage may vary.

Thanks for starting this thread. I've been watching the market carefully and will probably buy a house in the next 2 years.

But I hadn't thought about the "having to show income" part of the qualification process. Ha! Silly me.

Does anyone know when I get qualified, what number will they look at: actual income or income minus deductions?

What's more interesting here is that a common way to temporarily deal with income in a company is not taking a salary from your company for the first couple of years, rather just taking loans from the company to meet your cash needs as needed. At a later date, this gets converted into salary, and taxes get paid on it. It's been my experience that when doing this, you're in somewhat of a credit limbo when it comes time to show earnings.

Keith: You're correct given your scenario with a great credit score and a large amount down. I'm not denigrating banks here; frankly it can often be a wash. Please archive the Seattle Times article from earlier this year about banks charging higher interest rates and lower fees. The bottom line is what you're looking for. A competent professional, whether at a bank or a broker, will get the job done for you. We all desire to work with a true professional; good luck in your hunt.

Paul

Jennifer: The amount looked at is your adjusted gross income (income minus deductions) found near the bottom of page 1 of your tax return. Again, it's best to always fully document your income as that will get you your best rate. The good news is that first-time homebuyer programs are still available where you don't necessarily need to put a lot of money down. Choosing an experienced real estate professional will help you immensely. Good luck! Feel free to contact me if you ahve any more questions.

Paul

The condo I am buying would have been too expensive for me if my loan was based upon my stated income. However, the loan product I received was based on the gross receipts of my company and 10% down.

If low scores pose a problem in attaining a stated income loan, call me and we can disucss how my company can remove inaccurate items from your credit which will raise your Fico score.

As a certified mortgage planning specialist and according to state and federal laws, when you work with a mortgage broker you have to disclosure all fees on the good faith whether the borrower is paying them or the investor is giving back a yield spread premuim to the broker. Banks do not have to disclosure that much or at least I have found that some don't. My company is a net branch of Axel Financial and if I don't disclosure properly and the loan closes, funds not disclosure properly can and do get sent to the borrower. As for a self-employed borrower, my rule of thumb is similar to Paul McFadden's, disclosure all of your inocme. Also for a self-employed borrower, it is also important to work with someone who understands how an underwriter (I'm a former underwriter) looks at your tax returns. There are certain areas where we can add back in certain expenses which can boost your income. I am more than willing to sit down with anyone and help them determine what their income is based on their tax returns. Also don't forget about the seminar on the 15th of January. Charlie Czech and I will be talking about the self-employed borrower.