Are we close to qualifying? Tips for preparing for home loan

[Anonymous]

Hi there! My husband and I are working on our credit and saving to buy a new house. We have been homeowners twice before, but are currently renting. This time it is different for us because we own a business (files as LLC, SCORP) Can someone look at our details below and let us know how far off we are currently to possibly getting a pre-approval and an amount we would be able to borrow? I hope I included everything that is needed! Thanks so much!  

CREDIT SCORES (these are the fico mortage scores) - these will continue going up, we recently opened credit cards (had none before) 

MINE

EQ: 612

TU: 642

EX: 641

I have multiple collection accounts (maybe 10 total. These are ALL medical collections, most very tiny amounts) Some paid, some unpaid. Most recent from February of 2015, but many are 4-7 years old, 2 paid judgements that are set to fall off this year. No charge offs, no late payments on anything currently open. 2 current car loans, I'm still currently working on cleaning up my credit reports.

HIS:

EQ: 683

TU: 706

EX: 678 

two collections (all medical) mose recent feb 15, oldest about 2 years. 1 paid judgement that will fall off this year, no charge off, no late paymens on anything currently open, 2 current car loans

INCOME:

Mine: $52,000/year/Healthcare (I do not work for our business)

His: $53,000/year/President of the business we own

Both are W2 Salary Income. The thing that is tricky with this, is since we own a business, I believe they have to take the business profit/loss statement into consideration. Our 2014 was a loss of $11,000, 2013 was a loss of $25,000.

We also receive an adoption subsidy of $455/month if that counts

MONTHLY DEBT PAYMENTS: Total of $650/month

EMPLOYMENT: Both W2, however we own a business (my husband works for it, i do not). It is a LLC S-Corp filing. I have worked at my job for 1.5 years, but have a long employment history (Healthcare Services) Our business has been around for about 5 years. 

ASSETS/RESERVES: Approximately $20,000 for down payment and $15,000 in reserves

LOCATION: Oklahoma State, Oklahoma County. 

PROPERTY: Single Family HOme

VALUE: Would really like up to $300,000, if possible. Purchase. I'm assuming we will have to pay PMI also. 

OCCUPANCY: Primary residence

[Lemmus]

...one ...your numbers say you should easily qualify for 300k ...380k is probably around your top

...two ...if you both have W2 income over the past 3 yrs, afaik the business issue is immaterial ...its only when you are trying to use the business profits as qualifying income that it should be an issue ...you're not, thus it should be moot ...it may come up in underwriting but a straight forward LOE will answer it ...one of our mortgage pros will probably chime in if thats not the case

...you appear to be in good shape ...your mid score at 641 is what your preapproval will be based on and that will get you into most loan programs with decent rates although not the best ...but you already know that

...get a good realtor that listens and responds ...ask them for recommendations on lenders they have had good experiences with ...get a lender ...get a preapproval letter ...go shopping ...keep us up to date ...we really do like to hear what happens ...both the ups and downs ...helps everyone, eh ...hth 

[Lemmus]

...one thing I didn't catch the first read is the business losses ...if your P&L is showing losses for this year they will probably deduct that from your W2 income in figuring your DTIR and max mortgage ...w/o running the numbers again I can't say exactly what that will amount to but you should still qualify for at least your target 300k 

...its the IRS vs the mortgage loan industry ...businesses invariably are attuned to minimizing their tax liabilities and thus their income ...the mortgage lenders want to see exactly the opposite ...maximized income ...for most buyers this goes unseen ...but when the buyer owns more than 25% of the source of his income, he is automatically classified as self-employed ...and then it becomes a major contradiction ...you can't tell the lender "the company really makes $xxx" ...they are going off the tax filings for both your W2 and the business ...and they will find you own the business unless you are structured such that your name does not appear anywhere in public records of corporate ownership/indebtedness ...thats a standard UW search ...hth

[Anonymous]

That helps so much. For 2014 there will definitely be a loss, but likely not as much as 2013 (we file late, haven't finished the taxes yet), but for 2015 we may actually show a profit, or at minimum a very small loss. It's one of those things that's difficult to navigate as a business owner. Obviously losses for tax purposes help with not paying even more than we are already paying in taxes, however, it hurts us personally when trying to purchase a home. If we do have a profit this year, that really just means we will have more money to put as a down payment, since we will finally received a check after all these years of trying to build a business! If that happens, we could likely still get a more expensive home like we are hoping for. I will keep everyone updated! We have quite a while before moving forward with anything. I am mainly trying to get our ducks in a row and prepare as much as possible for the process again. 

@Lemmus wrote:

...one thing I didn't catch the first read is the business losses ...if your P&L is showing losses for this year they will probably deduct that from your W2 income in figuring your DTIR and max mortgage ...w/o running the numbers again I can't say exactly what that will amount to but you should still qualify for at least your target 300k 

...its the IRS vs the mortgage loan industry ...businesses invariably are attuned to minimizing their tax liabilities and thus their income ...the mortgage lenders want to see exactly the opposite ...maximized income ...for most buyers this goes unseen ...but when the buyer owns more than 25% of the source of his income, he is automatically classified as self-employed ...and then it becomes a major contradiction ...you can't tell the lender "the company really makes $xxx" ...they are going off the tax filings for both your W2 and the business ...and they will find you own the business unless you are structured such that your name does not appear anywhere in public records of corporate ownership/indebtedness ...thats a standard UW search ...hth

---

[Anonymous]

We own 50% of the business, not sure if that matters anymore than everything else. 

[Lemmus]

...depends greatly on how the conpany is legally established

http://mortgagegrapevine.com/docs/selfemployedincome.pdf

...afaik thats the rules that apply ...how much of the losses will count against you depend on how they were reported and how the underwriter analyzes them ...and not all losses will necessarily be counted ...again, it depends

...you will want to find a mortgage lender that has proven experience in dealing with SE loans ...then follow his advice ...part of the equation is going to be making a reasonable case that your business can sustain the income it is presently providing your DH ...hth

[Anonymous]

Awesome info. Crazy enough, the mortgage broker we will use owns the other 50% of our business. I think something that might help is my husbands W2 income has stayed the same through the years, even with the loss showing on the business taxes each year. Also, the loss has decreased significantly each year we have been in business. I really cannot imagine how complicated it is. This year we will do about 500,000 in sales, but after everything/everyone is paid and taxes are done, it will probably be right around a wash on our K1. 

@Lemmus wrote:

...depends greatly on how the conpany is legally established

http://mortgagegrapevine.com/docs/selfemployedincome.pdf

...afaik thats the rules that apply ...how much of the losses will count against you depend on how they were reported and how the underwriter analyzes them ...and not all losses will necessarily be counted ...again, it depends

...you will want to find a mortgage lender that has proven experience in dealing with SE loans ...then follow his advice ...part of the equation is going to be making a reasonable case that your business can sustain the income it is presently providing your DH ...hth

---

[Anonymous]

The loss will be counted but as a two year average since it's getting better. Was the W2 income for your husband consistent in 2013 as well? Just glancing at the numbers I don't think it will kill you that much as you have income to supplement.

The adoption subsidy is a possibility to be used, depends how long you've had it and if it's likely to continue. It's not off the table though.

[Anonymous]

No, it wasn't consistent in 2013. He had taken himself off of W-2 and did 1099 for part of that year (and 2014). I know, I hate how inconstent he was with it. It really complicates things for the mortgage process and we are kicking ourselves now because of it. However, he is staying on as W2 now and will continue to stay on. We likely won't buy until 2016. By the time we purchase, we will have had the adoption subsidy for 2 years. She was adopted from foster care and meets all qualifications for us to receive a subsidy until she has graduates from High School in 2030.

---

@Anonymous wrote:
The loss will be counted but as a two year average since it's getting better. Was the W2 income for your husband consistent in 2013 as well? Just glancing at the numbers I don't think it will kill you that much as you have income to supplement.

The adoption subsidy is a possibility to be used, depends how long you've had it and if it's likely to continue. It's not off the table though.

---

[Anonymous]

Even better then, if you can get 2015 returns in time for your loan, and there is no loss in 2015 and the overall net income to your husband is consistent (the W2 income minus biz losses) you'll be okay and nobody will look or care about 2013. With the adoption subsidy as a plan B, even better.

I know you know this but work on the credit scores in the meanwhile, you will get hit with huge risk based pricing adjustments at those levels, and might struggle to get PMI approval if going conventional.