Mortgage Loans for Self Employed! #selfemployedmortgageloanrequirements

Mortgage Loans for Self Employed! #selfemployedmortgageloanrequirements

I talk to a lot of self employed business 
owners who want to buy a house but are   grossly unprepared to do so.
In this video we re going to   talk about how self employed business 
owners can qualify for mortgages and   how you can prepare yourself for loan approval.
My name is Chris O Connell and I m a mortgage loan   originator and I m also a small business owner.
If you re a small business owner and you ve   applied for a mortgage in the past, 
you may have found banks and lenders   have a different set of rules for you.

And they do, which is fine, you just have   to know what they are and how 
to use them to your advantage.
  Traditional mortgage guidelines for self 
employed borrowers are determined by Fannie Mae,   Freddie Mac, and HUD and they re different 
than a w2, hourly, or salaried employee.
  There are also non traditional 
mortgage products that you may   qualify if you don t meet the traditional 
mortgage guidelines, so watch this video til   the end so you know all of your options.
The number one thing business owners need   to know is how their income is calculated. For 
traditional mortgages, banks and mortgage lenders   will use what you re reporting on your 
tax returns to calculate your income.
  Now hold on, we don t use your gross income 
or your business revenue, we use your net   income that you re reporting on your schedule 
C or your distributions listed on your k-1.
  You probably file as a sole proprietor, LLC 
or Corporation. So let s look at an example.
  If you re a sole proprietor or 
LLC you should have a Schedule   C on your tax returns, which looks like this.

Your CPA s goal when preparing your taxes is to   limit your tax liability and they 
do that by writing off expenses   and reducing your taxable income.
And that s great from a tax standpoint,   but not necessarily when you re trying 
to get approved for a mortgage.
  After you write off all those expenses, 
what s left is your net income reported   on line 31,(insert sched C pic and point 
to line 31) which is what lenders use.
  So if you report $100,000 in 
revenue and $90,000 in expenses,   your net income is $10,000 per year.
But here s the second most important thing   to know we add back certain expenses to your net 
income which increases your qualifying income
  These 4 items are Depletion, Depreciation, 
Business use of your home, and Mileage.
  So let s say you have some business equipment 
and you have depreciation of $5,000. You   would add that back to your net income.
And let s say you have another 4,000 miles   on your car from business travel, you can 
take $0.27 per mile or $1,080 and add that   back to your net income as well.
The 3rd most important thing to know,   is most of the time, a lender is going 
to look at your last 2 years tax returns   and take your average income to qualify.

If your business income is increasing from year   to year, they ll average it.
So let s say your 2019 net income   is $20k and 2020 net income is $40k and there are 
add backs, the average would be $30k per year.
  If it s decreasing, they take the lower amount. 
So flip that around if 2019 was $40k and 2020 was   $20k, they ll use $20k per year.
Now you might be asking, I m a business owner but   I pay myself a w2 and have a corporation which 
I have a k-1 for instead of a Schedule C.
  That s fine, if you have a 2 year history of 
paying yourself a w2, we can use that income   just like a regular employee.
We would also use the k-1   however, either line 1 or the distribution on 
line 16d, whichever is less. Same idea applies,   if it s increasing, we ll average it, if it 
s decreasing, we ll take the lower amount.
  You can see how you might work with a CPA to 
better prepare yourself to qualify for a mortgage   given what we just went over.
And maybe you think, well I ll   just show all this income and not report any 
expenses so my income looks super awesome.

bank statement mortgage loan

  2 things to keep in mind. First is the biggest 
thing, if you do report a lot of income,   you may have to pay taxes! Any taxes owed 
to the IRS must be paid in order to qualify   for a mortgage or a payment plan would 
have to be established and that monthly   payment needs to be included in your debt ratio.
Second since COVID, lenders are going one step   further to verify your income matches with 
what you re reporting on your tax returns.
  Underwriters will typically ask for a 
minimum of your last 3 months business   and or personal bank account statements to show 
your revenue this should be close to what you ve   reported on your tax returns in the past.
If the last few months have been slow,   you can show the last 6 months if 
that gives a more accurate number.

  Or a letter of explanation about your 
business and when the busy and slow   times per year are might suffice.
Once a lender knows your income,   the traditional mortgage is the same for 
a business owner as anyone else, minimum   credit scores, max debt ratios, etc all apply.
Okay so what if your tax returns aren t where   they need to be and you don t have 
time to prepare next year s returns   and you want to qualify for something now?
Non traditional Busniess Bank Statement programs   may be your best option. This is where a lender 
takes either your last 12 or 24 months business   bank statements, adds up all the deposits every 
month and uses that for your gross income.
  Then they ll usually take half of that, which 
would be a 50% debt ratio which is generous   and use that for your qualifying 
income. No tax returns necessary.
  That sounds way easier, what s the catch?
Typically there are 3 things to know.
  1. Compared to a traditional mortgage product, 
these programs will have higher rates, which are   going to be at least 1% higher than traditional 
mortgages, but can be 2 or even 3% higher
  2. You will typically need a higher minimum credit 
score 660 for instance instead of the minimum   620 for a traditional conventional 
mortgage or 580 for FHA loans

You ll also need a larger down payment, 
10% minimum vs the 3 or 3.5% minimum for   traditional loan programs.
The best thing you can do   is present your information to a qualified 
mortgage loan officer the analyze your   situation and tell you what your options are.
I ve even worked with borrower s CPAs to help   buyers prepare for their future home purchase.
If you want to try and calculate your own income,   click on the link in the description to get 
a Fannie Mae s Cash Flow analysis worksheet,   which also includes rental income, capital gains, 
interest and dividends if applicable.

As found on YouTube

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