Thou Shalt File Thy Taxes With Foresight!

By
Mortgage and Lending with Guaranteed Rate NMLS# 2611 NMLS #208860

1040 tax form"But I make $60,000 a year!"  No, according to your 2008 tax return, you make $12,000 a year and that $250,000 home in Sarasota might be just a bit out of your price range.

It's a bitter pill to swallow but there's a lot of pill-popping going on these days and the self-employed borrowers are feeling a bit sick to their stomachs.  If only they would have obeyed Lending Commandment III:

III - THOU SHALT FILE THY TAXES WITH FORESIGHT

THE SIN - What am I talking about?  A classic case of poor planning.  As a self-employed individual myself, I can completely understand writing everything off on my taxes from my home office to the box of paperclips I bought last week.  You want to show as little income as possible so you pay the least amount of tax.  But of course, when you want to buy a home, you want to show as much income as possible.  It's a painful catch 22, and I'm sure a lot of brokers in mortgageville are feeling your pain as well.

THE WIN - Plan ahead.  If you know you are going to buy a home soon, claim more income if you are self-employed.  Rental income, second job income, capital gains.  Bring it on.  True story.  Had a borrower this year that was working for his dad's pool company.  He wasn't making enough to qualify for the loan he needed, so I suggested he increase his W2 pay and decrease his monthly bonus.  He did just that and in 3 months, he quailified for an awesome USDA loan with no problems.

Now, it may take a bit longer for some.  Real estate investors need to have two years rental experience for the most part.  And mortgage underwriters are looking at the past two years for a lot of types of income.  Talk with your CPA as well because they can help you strategize on how to meet your goals.  If you plan appropriately, you'll be on your way to saying "10-40 good buddy" in no time!

Comments (5)

Syreeta Saunders
Keller Williams Realty Centre - Randallstown, MD
Keys, MBA - The Keys2Day Team

Great advice Mike - I've run into this a couple of times.

Oct 21, 2009 01:19 PM
Ruth Vogt
Fairway Independent Mortgage, LLS. Equal Housing Opportunity. Regulated by the Division of Real Estate. - Colorado Springs, CO
719-592-0855 Apply 24/7 www.ColoradoHomeLender.com

I always tell my self-employed borrowers that they are either going to love their tax accountant or love their lender, but they can't love us both!!!

Oct 21, 2009 01:19 PM
Ron Brown NMLS #270845
NMLS ID: 40831 - Federal Way, WA

I ran into that same situation just today.  Borrower wants to refi/remodel.  I told him what it would take to qualify, and explained Debt to Income since his wife runs a daycare (self employed).  He assured me they would have no problems.  I get the tax returns, and she can only demonstrate $1,000/month in income when they assured me of a 6 figure annual!

Oct 21, 2009 01:20 PM
Lynda Eisenmann
Preferred Home Brokers - Brea, CA
Broker-Owner,CRS,CDPE,GRI,SRES, Brea,CA, Orange Co

Hi Mike,

Yep, we see it too, it's an ongoing issue for many, especially now that stated loans are history. One just can't have it both ways. I'm surprised the person in your example accomplished that in 3 months?

Btw, I qualified for a r.e. loan last year myself, it had been a while. The documentation (for the best sub 5 rate) was unbelievable...thought I might have to give up a kidney at one point.

Oct 21, 2009 01:22 PM
Mike Tullio
Guaranteed Rate NMLS# 2611 - Sarasota, FL
VP of Mortgage Lending

Thanks for the comment Syreeta.  What happened to stated income?  It's been too long.

Great perspective Ruth.  I'm going to steal your pearl of wisdom.

Yeah Ron.  The gross receipts and income tell a much different story than the bottom line.  So we tell the truth, gently, but tell the truth.

Thanks for sharing Lynda!  Sometimes small mortgage miracles happen and it's nice when they happen to people like us.

Oct 21, 2009 02:19 PM