My New Blog

I have recently come across some issues with some of my self-employed borrowers so I have decided share some knowledge that could help my clients or Realtors save some time.

Key points to note:

· Have you been self-employed for over 2 years? In order to obtain a mortgage you must show 2 years of self- employment history. In some cases if you have been in the same industry and were W2'd and are now 1099 but doing the same thing it could be Okay.

· Income calculation – Almost all self-employed borrowers claim a much lower income than they actually make in order to pay less income tax so make sure to note your income listed on your schedule C line 31 of your tax return. That is the income we will be using to qualify you, this is the income after your deductions but before your income taxes are taken out. In many scenarios we can add back the depreciation listed on your tax return. For the self-employed borrower we take the last 2 years income and take an average but keep in mind the underwriter will have his/her eye out for depreciating income from one year to the next. If so the underwriter will want to see your most recent tax return (even if it has not been filed yet, so they may not take an extension).

· Tax time – Try not to get stuck waiting for the previous year’s tax transcripts. All mortgages require tax transcripts to be ordered from the IRS even though the lender has complete tax returns that may be stamped from the IRS. The IRS may take up to 8 weeks after returns are filed for transcripts to be available. You’re better off getting an extension at tax time if you’re in the process of getting a mortgage. If your income is depreciating from one year to the next the underwriter may require the returns and transcripts regardless, which leaves you waiting to close until transcripts are receive d from the IRS. (DEAL KILLER)

· If the borrower owns more than one business the underwriter will want to see all business returns and K1s for every business that is owned by more than 20%. (THIS WILL MAKE FOR A THICK FILE AND CAN GREATLY INCREASE YOUR UNDERWRITING TIME)

Other things that can make a file more complicated for the self-employed borrower:

· If the borrower is not the sole owner and they are using funds from the business bank account for down payment.

· If the borrower us using business income but is not the sole owner of the business.

· A business owner that does not use a CPA for his taxes.

A self-employed borrower’s mortgage file can get complicated fast even if he has perfect credit and many things can come up. Always remember, in the current mortgage climate it is no longer the Underwriters place to try to find a way to get the borrower approved, it is now the underwriters place to find a way to decline the file. If the borrower knows of a possible issue it is best if they are upfront about it to their Loan Officer so that it can be presented in the good way, because the lender/underwriter will find the issue regardless of whether the borrower is upfront or not.

Hope this helps,

Samuel Morales

Loan Officer