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How self-employed borrowers can get the best rates

By Jeff Lazerson

3/8/18

What I think: Tax season is now. So, it’s income optimization time for self-employed borrowers (anyone that owns 25 percent or more of any business). Well, at least for those applying for mortgage credit in the near future.

You don’t necessarily need to be self-employed for two years. Fannie Mae and Freddie Mac have specific parameters that may allow one-year self-employed borrowers to qualify.

Doctors are a separate category for a few jumbo investors (above Fan and Fred’s loan limits), offering financing for one year of self-employment.

Rule number one is you can’t have your cake and eat it too. That is, don’t whittle away your taxable income by under-reporting to Uncle Sam and then get mad at your mortgage man because the mortgage machine can’t qualify you for the McMansion you are eyeing.

Planning ahead is the key to understanding your maximum mortgage qualifications.

Explain your general down payment, loan amount and monthly maximum payment parameters to your lender. Send along draft copies of any corporate and personal tax returns. Allow your loan person to take your application and run your credit as part of the dry run. Don’t worry about your credit score getting hit. Your scores will go back to where they were shortly after the inquiry.

Here are some helpful hints:

1. If you have a note due and payable in less than one year, lenders view this as an income deduction unless you can offer proof of a renewal line of credit.
2. Company car payments won’t count against your debt ratios so long as you can provide 12 months of business bank statements as proof that the company pays. Anything under 12 months of will be counted against you.
3. Depreciation, depletion and amortization can be added back to your business income. Meals and entertainment can’t.
4. Take any down payment money out of the business bank account and put it in your personal account three months ahead of buying since you have to provide the last two months personal bank statements. If you don’t, then either the lender has to do a business cash-flow analysis or your CPA will be asked to write a letter explaining that this money removal will not adversely affect the business.
5. If your income is declining, the lender will focus on your most recently filed tax returns. If your income is on the upswing, the lender will either average your last two years or just accept the most recent one year.

Yes, there are plenty of bank statement loans, profit and loss statement loans and true stated income loans that qualify you with much fuzzier math than your tax returns. But there is catch especially with larger loans.

“Full doc jumbo loans can improve your rate by one percent to 1 ¼ percent,” said Keith Stubbs, vice president at Calabasas-based Mega Capital Funding.

Besides better mortgage pricing, accurate income reporting means you will sleep better at night since you won’t be worrying about an Internal Revenue Service audit gone bad.

If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.