As a Mortgage Loan Originator, I deal with folks of all different income brackets and lifestyles. Yes, some of us remember the old TV show, "Lifestyles of the Rich and Famous" where people made big incomes and lived in big houses and drove fancy cars. But getting a mortgage is a whole different ball game. Appearances alone aren't enough.
For people with higher incomes, they commonly use their income in ways that can be deducted or "written off" on their annual Income Tax forms. As a result, their tax burden is lower and they get to keep more of their money in hand. Sounds like a great plan, doesn't it ? In most cases, the answer would be yes but in the world of mortgages, that might not be a good thing.
I get a call from a potential client. They say their monthly income is around ten thousand dollars a month and they want to purchase a new home. I'm thinking that shouldn't be difficult with a six figure annual income. So I get the necessary information from the client in order to preapprove them.
OK, confirm the employment as a consultant. Makes the salary I was told; good. Get the credit report and it is within the range for a good rate. I'm just about done here and it's looking good for them to buy that house they want. One more thing; have to check the tax returns for the last two years.
Uh - Ohhhhh. This is BAD ! This is REEEEALLY BAD ! The client is self employed. The job requires a lot of travel and I mean a LOT of travel. I could not believe my eyes when I got to the line for "Adjusted Gross Income" on the form 1040. That figure was barely $3,000.00 per month. What ?
Why is this so low ? I began to go through the pages and pages of the first return and there was the answer. Just to make sure it wasn't a fluke, I went through the second year's return and yep, there it was again. I didn't realize one person could travel that much. There were pages and pages and pages of tax write offs for all kinds of various travel expenses.
From airline tickets to rental cars, hotels to restaurants, clubs and taxis; there were expenses coming and going. Self employed persons often have write offs but this one took the cake. After all of these deductions, the debt to income ratio was at 90%. This person CAN'T be approved.
Qualifying for a mortgage is based on your actual, reported income; not your salary. If you write everything off, you have NO INCOME. That's right, according to the form 1040 tax returns this client had filed, this person was spending ninety percent of their income on their debt load.
It doesn't matter that you have a six figure income. You don't qualify regardless of how many BMWs are in the driveway. The outward appearance of wealth does not qualify you for a mortgage.
A big salary is not enough to be approved for a mortgage. If you are self employed and usually have a large amount of write offs, you might want to get with your accountant now and review your "Adjusted Gross Income" for the last two years. You may be able to amend your returns.
It is best to plan ahead so that you are documenting sufficient income to qualify for a mortgage. If you fall into this category, I can help. Putting together a plan two years BEFORE you are ready to buy is the solution.
We will go over your documented income and determine if it is adequate to qualify for the mortgage you want. If not, we can work toward that goal in a planned manner so that there will be sufficient documented funds when it comes time to do your mortgage.
I hate rejecting an application for a mortgage. And I bet you hate being rejected too, right ? Then let's avoid this pitfall and plan ahead of time. The best idea is to prepare and heed this . . . . .
Important Mortgage Warning
For Self Employed Individuals
Deanna Early is the # 1 ranked Mortgage Loan Originator in Franklin County, Virginia as scored by the ActiveRain real estate site. She is a Nationally Licensed Mortgage Loan Originator located near Smith Mountain Lake, Virginia. She does both purchase and refinance loans throughout the state of Virginia. She is a residential loan originator for American National Bank and Trust. She provides home mortgage loans, construction loans and lot loans as well as second or vacation home loans and investor financing.
Please visit her website at www.DeannaEarly.com and learn more in the Virginia Mortgage Blog.
You can contact her for your financing needs at (540) 721-2349 or by email at "firstname.lastname@example.org"
The views expressed in this post are mine only and do not necessarily reflect the views of American National Bank and Trust Company. Any scenarios presented are for illustrative purposes only and are not intended to refer to or represent any actual or specific clients, negotiations or financial transactions.