Overcoming the self-employment hurdle?

[Tooliebell]

In our quest to become FHA approved for a new home/farm, I am completely worried about our self-employment income.  We started and built our dairy farm about 5 years ago.  We had to buy everything, equipment, cows, buildings.  In the 5 years we have operated this farm, we have never shown a profit, but it is because I am able to depreciate so much.  We have a truck loan and a 4 wheeler loan that are farm expenses.  My question is:

1.  Are lenders only going to look at that bottom line? 

2.  Can they remove the depreciation to see what we truly would have made?

3.  When doing the DTI ratios will they remove the truck loan and 4 wheeler loan?  What if I just went with my income?  My name is on those loans but I dont pay them, the farm pays them.

Any advice or words of wisdom to help me so i know how to combat the questions we will no doubtly get.

[Anonymous]

There is no such thing as a self-employment hurdle, there are just loan officers that don't know how to read tax returns correctly.

You hit the nail square on the head---depreciation is a paper-loss that we add back when calculating income.  That sort of covers #1 and #2.

For question #3, same deal.  It's very normal for business owners to have personally secured some item needed for their business.  If it is a business expense and therefore counted in that side of the tax returns, we won't double-hit you by including it on your personal credit. 

When it comes to finances, how organized are you?  Are you more on the "save everything" or more on the "I throw out statements before opening" end of things?

[Tooliebell]

I don't get many paper statements.  I do mostly e statements or go paperless.  But that doesn't mean I don't know where to get those things if I need them.

But otherwise I am very organized.  I can show the truck payment comes directly from the farm checking account.  The 4 wheeler comes out of our personal account just because.  I should switch that over. 

I really appreciate your help.  I felt I had a pretty good understanding of how mortgages work from working with the mortgage department in a credit union for a couple of years.  But the last time I spoke with a lender, it sounded like we would automatically not be able to count any farm income because we don't show an income.  Which really isn't true, it is just that certain tax rules have worked in our favor the past five years.

I am thinking I will be able to qualify us for most of the home loan we need based on my income, but I may need just a small portion of what the farm income is to get us into that home we want to buy.

[Anonymous]

I grew up in Wisconsin between dairy farms, but I guess at that age I was more interested in the absurdly large fish that grow in private ponds, not the tax schedules.

If you are more or less making $0 from the farm, your income will be more or less equal to $0 plus the depreciation.  I could look at tax returns and confirm how that would be calculated, but I rarely meet a self-employed person in a capital/depreciation intensive business like yours whose "mortgage income" isn't higher than their "taxable income." 

As for the other statements, electronic is probably easier.  I wouldn't make any changes on that 4-wheeler right now, but you probably should at some point.  Underwriters can figure out almost anything, as long as it is consistent.