Self Employed - low income but decent credit score - wanting to buy home plus investment property

[Anonymous]

I want to get a mortgage loan, I just checked my credit score and (yeah) it's averaging 704 (714 Experian) (694 Transunion) (703 Equifax).

I've been self employed since 1993, my income fluxuates as I'm in sales - only issue is I used my credit cards as lines of credit (well

a few minor bo bo's on my credit report too) but the cards are saying since I haven't missed payments it's ok. 

But I haven't been showing enough in income on my taxes. I got a divorce and we filed an extension for 2008 so now I have to finish

my 2008 and 2009 taxes both - and need to do it quickly as the bank will need two years of taxes to qualify for a loan.

I don't have a car payment, just credit cards is my only loan now (thanks to Dave Ramsey program but dang should have cut the cards).

Anyways the bank said I'd have to show about 12k in income and they'll count the 10k per year in child support as income so together

it would be 22k per year to qualify for a loan of 80k or so - I live in an affordable town so I can find a decent house for 125k or a bit more

or less. 

Anyways if I show more income/profit of course I have to pay the IRS more and most of what I write off is legit... I write off rent, eating out,

gas, part of utilities etc. Business hasn't been that great in a recession but stable. But I'm thinking I'd like to buy an income property or

two as well as a home for my boy and I. 

In my town one can buy rental properties in the foreclosure market for 35-30k and put maybe 10k into fixing them for about $600 per month 

rent. Or I could buy a duplex for about 70-120k depending on where it's located. Of course I could buy a better rental property for 50-80k

too and fix it a bit. I was thinking I could get income from rents to help.

I have 70k cash from my divorce sitting in a money market account making almost nothing. I pay $800 per month rent now. I'm worried that if

I buy a home and am not showing enough income the bank won't let me buy a rental house if I want to even with a good down. So I was

even thinking of using an owner finance on one home and make it not show on my credit report - have an investor hold the deed perhaps 

until I qualify for the next home... 

They've changed all the rules now - thank goodness my credit score is up six months later - six months ago it was only like 640 and some things

disappeared. Now banks are saying they want credit scores of 700 or more for someone to qualify for an investment property. Excuse my rambling

but does anyone have any ideas? Or should I just buy a house for my boy and I and put more money down rather then consider an investment

property as well? My former landlord said I should try to buy a four plex because I have cash down and many investors don't... 

Thank you

[Anonymous]

First off, you need to get taxes filed right away.  It will take them many months more than likely to process 2008 returns and they have to be processed before you can get a loan.  It is not just that they have to be filed.  They have to be filed, all taxes owed have to be paid, and they have to be processed and transcripts available.  When you are talking old tax returns, that can take many months (I am still dealing with this from this time last year... but my case is not the norm.  I would say 3 months minimum and up to 6 months before they will have 2008 transcripts available.  Not as long on the 2009 though as they will be the priority with IRS right now.  As far as write-offs, that is up to you to decide.  YOu are going to pay the piper of you do not write off those expenses, but you probably do need the income more than anything.. Also, if you are thinking of getting into the rental market, you need to keep a big chunck of that savings you have in liquid assets for emergencies.  When you rent to someone, you have basicly 1 business day to address any problem that comes up so if a furnace blows, roof leaks, pipes bust, you need to have enough cash sitting around to take care of it (and it does not appear from your normal income that you would be ableto do this "out of pocket"

My advice would be to maybe hold off on the investment home right now.  Buy the house using 20% down from your market account to avoid paying PMI and 20% down will go a long way to getting an approval.  Once you are settled into your new home and have adjusted to the real cost of owning a home (assume your mortgage is only about 60-70% of the real cost when you factor repairs, remodels, and higher utilities, etc) then see how you feel about the rental stuff.  Home renting is not a real for profit business.  It is a long term asset developement situation, but many years is actually a cash LOSS (although not a loss in assets).  You do not ever really get the benefits of the asset value though until you go to sell, or if you keep refi'ing and taking money out.  SO be careful.  Many people jump into the rental stuff not thinking that many years, they will be lucky to break even and will often loose money (especially when a bad tenant leaves or years when a long term tennane leaves and you legally have to do a bunch of repairs at once.)