Back to Gross Income instead of AGI to qualify?

[Anonymous]

For the self employed, lenders had always used your gross income to qualify. Since the the collapse they now use AGI. Does anyone know if the banks will be going back to using Gross income rather than Adjusted gross income in the forseeable future? I heard Dodd-Frank has something to do with it? If Trump repeals dodd-frank as he said he wants too, will that take us back to gross income. I can't buy a house unless this changes because my accountant has my AGI so low for tax purposes. However, my gross is plenty.

Thanks, Darryn

[ShanetheMortgageMan]

Hi Darryn, what do you exactly mean by "gross income" and "AGI"?

AGI (stands for Adjusted Gross Income) is line 37 of IRS Form 1040.  The AGI figure not only considers self-employment income (from a sole proprietorship, corporation or partnership), it also considers W-2 earnings, moving expenses, student loan deductions, health savings plan deductions, and a bunch of others (lines 23-35 on Form 1040) that won't impact someone's qualifying income.  For the record, AGI won't ever be used.

When you say "AGI" do you really mean Net Profit (line 31 of IRS Schedule C)?  That figure has always been used to help calculate self-employed income (of someone who files Schedule C) when tax returns have been provided.

For self-employed people there are still "bank statement" loans which will use bank statement deposits to calculate income (rather than tax returns), which is basically using "gross sales" to calculate income, and there are still "no doc" loans (which violate Dodd-Frank guidelines, so lenders come up with some creative workarounds on those, i.e. can only be used as an investment property).  We do not see any "stated income" loans anymore, it's either documenting income (in some form or another) or no income is listed at all.  The secondary market has already had a taste of stated income loans and it was quite bitter.  Even if Dodd-Frank is repealed I doubt we'd see a return of them.  Anything is possible, but I wouldn't make any plans on it happening.

[Anonymous]

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@ShanetheMortgageMan wrote:

Hi Darryn, what do you exactly mean by "gross income" and "AGI"?

AGI (stands for Adjusted Gross Income) is line 37 of IRS Form 1040.  The AGI figure not only considers self-employment income (from a sole proprietorship, corporation or partnership), it also considers W-2 earnings, moving expenses, student loan deductions, health savings plan deductions, and a bunch of others (lines 23-35 on Form 1040) that won't impact someone's qualifying income.  For the record, AGI won't ever be used.

When you say "AGI" do you really mean Net Profit (line 31 of IRS Schedule C)?  That figure has always been used to help calculate self-employed income (of someone who files Schedule C) when tax returns have been provided.

For self-employed people there are still "bank statement" loans which will use bank statement deposits to calculate income (rather than tax returns), which is basically using "gross sales" to calculate income, and there are still "no doc" loans (which violate Dodd-Frank guidelines, so lenders come up with some creative workarounds on those, i.e. can only be used as an investment property).  We do not see any "stated income" loans anymore, it's either documenting income (in some form or another) or no income is listed at all.  The secondary market has already had a taste of stated income loans and it was quite bitter.  Even if Dodd-Frank is repealed I doubt we'd see a return of them.  Anything is possible, but I wouldn't make any plans on it happening.

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Thanks, Shane. I thought I was clear on the GI vs. AGI in my post, sorry if it was misleading. In fact that's the question. I do file schedule C and all that. My net and AGI are pretty close the way my accountant sets it up. His job is to have me pay the very least amount of tax. For the sake of this question I'm just refereing to AGI because that's what I was shot down on by a few lenders that saw the low AGI, about 14,000. My provable (bank statements) gross, however, over the last 3 years is about 65-70k with about another 20% I receive in cash that never sees a bank. I have all my bank statements and income records from all my jobs but the bankers wanted nothing to do with that after they saw my tax returns... Are you saying I can walk into a lender and show them my bank statements and that will pass as income? And I'm not looking for sub-prime (if that even exists anymore), I want a going market rate 30 year fixed. It will likely have to be an FHA because I don't have 30k+ to put down. My credit is 730 and perfect except for a short sale in 2012 and 820 on Equifax that's missing that file. 

So, I thought maybe it was the law now that lenders had to go by the AGI or NET instead of GROSS. In the 90's and early 2000's I bought a home and refied twice and everytime they went by GROSS income. Same with several auto loans. As far as I remember back it was always GROSS for any lending but now it's not according to all the people I talked too.

[Anonymous]

I am self employed as well. They base it off your income after all expenses. This is why for the past years I have cut back on many deductions in preparation for applying for a mortgage. I'm looking forward to getting back to maximizing deductions next year!

[Anonymous]

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@Anonymous wrote:

I am self employed as well. They base it off your income after all expenses. This is why for the past years I have cut back on many deductions in preparation for applying for a mortgage. I'm looking forward to getting back to maximizing deductions next year

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I thought of doing that but it would put me in a position of paying the government far more tax which I'm really opposed to. It would eat into my down money as well. Also, it would effect my health insurance as well, I would lose it. And until Trump get's the market under control I would be looking at astronomical health insurance costs. Anyway, If Shane is right, I would like to see if I could qualify for a loan with bank statements and business income receipts and leave my tax returns out of it. I don't know if that would jive with an FHA loan which is what I need but will check this week.

[ShanetheMortgageMan]

FHA won't use bank statements as income.  Bank statement programs are a type of conventional (meaning non-government) loan program, usually requiring 10-30% down.  Rates will be higher than regular conforming or FHA rates, but not astronomical (assuming excellent scores).  You will not get the "going market rate" that someone would get if they were able to document their income with tax returns, W-2's, paystubs, etc.

If a lender mentioned your AGI when discussing income then you should end the conversation pretty quickly after that, since that would exhibit they have no clue how to calculate self-employment income (or any income for that matter).

Since you file Schedule C, then you take your Net Profit from line 31, add back in depreciation & depletion (lines 12 & 13), add back in business use of home in some situations, and subtract deductible meals & entertainment (line 24b, since you only deduct 50% of those expenses on the Schedule C, the underwriter still knows you had 100% of the expense).  If your income calculation goes like that, then you know you have a loan officer who can properly calculate income.

I don't doubt that in the past that lenders have gone off gross income from a Schedule C, but AGI would've never been used (I've seen the rise & fall of those types of mortgages).

[Anonymous]

Yep... we've been hit with the penalty the past 2 years for not having health insurance. I just can't afford $1,400/mth for 2 adults and 1 child with a high deductible. Paying those extra taxes has sucked but it was what had to be done (had to pay close to 25k in taxes for 2016).  I've made a list of all of the deductions that I'll be able to take on our 2017 return so I can keep track of the expenses throughout the year.

[Anonymous]

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@ShanetheMortgageMan wrote:

FHA won't use bank statements as income.  Bank statement programs are a type of conventional (meaning non-government) loan program, usually requiring 10-30% down.  Rates will be higher than regular conforming or FHA rates, but not astronomical (assuming excellent scores).  You will not get the "going market rate" that someone would get if they were able to document their income with tax returns, W-2's, paystubs, etc.

If a lender mentioned your AGI when discussing income then you should end the conversation pretty quickly after that, since that would exhibit they have no clue how to calculate self-employment income (or any income for that matter).

Since you file Schedule C, then you take your Net Profit from line 31, add back in depreciation & depletion (lines 12 & 13), add back in business use of home in some situations, and subtract deductible meals & entertainment (line 24b, since you only deduct 50% of those expenses on the Schedule C, the underwriter still knows you had 100% of the expense).  If your income calculation goes like that, then you know you have a loan officer who can properly calculate income.

I don't doubt that in the past that lenders have gone off gross income from a Schedule C, but AGI would've never been used (I've seen the rise & fall of those types of mortgages).

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Ok, thanks, Shane!

[Anonymous]

I can totally relate to the above posts.
My husband and I have our own business for over 30 years.
We have $20,000.00 plus in the bank, 700 plus credit scores and nobody will touch us to give us a mortgage!!
We bought our current home "No Doc" in 1999.
We are still here...not everyone defaulted.
Bottom line....if your figures don't fit the Dodd-Franks software program, you are out of luck.
We were treated with such disrespect.
I tried 9 lenders.
The door is nailed shut until something changes.

[Anonymous]

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@Anonymous wrote:

I can't buy a house unless this changes because my accountant has my AGI so low for tax purposes. However, my gross is plenty.

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I'm in the same boat. I've posted a thread about my tax strategy effectively eliminating a mortgage as an option to expand my rental business where I  have been purchasing rental property for cash for the last 5 years. I'd like to move on to larger deals and I always pay. But my AGI is so low that all applying for a mortgage does is lower my credit score!