Self Employed strategies

[Anonymous]

My wife is looking to apply for a mortgage soon. Both of us are self employed. I will not be on the note as my debt will horribly skew her perfect DTI with little income value add.

Gross this year on her side was ~$125k her takehome after rent is closer to $75k before taxes. 

Are there strategies she can take advantage of regarding income and not claiming deductions?

Is it best to take all possible deductions and use the income left over?

She has zero debt.

We are playing AZEO, that can be frustrating while using many accounts. We've since gone to using only the double cash while we get ready for applying.

I have $8k remaining in student loans (all in green) and ~$39k remaining on truck.

Her FICO 8 numbers are all near or above 750

She wants a new house like yesterday and her credit is in a good place. Rates are in a nice place.

I just don't want to make any mistakes.

This will be our first home.

We are not interested in an FHA really with having to pay insurance for the life of the loan.

Neither of us are veterans but both of us have grandparents who served.

Short synopsis of past two years; we started rebuilding in May of '18 with low 600 high 500 scores. With help of these boards we have been able to completely rebuild and both have mid 700 scores. It all started with Discover IT and $200 and some behavior changes.

We are now in a strong position to make a move on a house but self employed/deductions might be the limiting factor as relating to an amount of house we'll be happy with.

Thanks anyone who reads and have a great 2020!

[ShanetheMortgageMan]

First thing to do is to see if her current 2017/2018 self-employed taxes will qualify her for what you are trying to accomplish... if not, then you can make some decisions when it comes to filing her 2019 taxes. 

Is your wife's business a sole proprietorship (IRS Schedule C), an S-Corp (IRS Form 1120s) or a Partnership (IRS Form 1065)?  That answer will determine how her self-employment income is calculated.  If you are already 100% certain on how income will be calculated, then $75k can be used for the time being.

How much of sales price are you trying to qualify for and how much ($ or %) of a down payment are you planning on putting down?  With conventional financing, if she is a first time homebuyer, you can put as little as 3% down.

[Anonymous]

Thank you, she is a sole proprietor. 

Will be using tax years 2018/2019. 

She made considerably more in 2019 than she did in 2018 and will continue to.

I'm afraid when it's time to apply even with her $0 DTI she might not qualify for as much as we're hoping.

I have heard of some lenders/banks(?) using Freddie Mac only default to the most recent 1yr if it doesn't need manual UW? Contrary to the 2yr requirement.. not sure if there's any hope there.

3-5% ideally down on $250-350k

I've been trying to come up with compensating factors to help buffer the 2018 tax year anchor but I'm not sure there's anything we can do about it.

The easy answer is to wait another year, but neither of us are trying to hear this at all.

We have a large family and have outgrown our place, this year is ideal for sanity sake.

Is it hard/impossible to find a conventional 97% 3% on 1 year of income self employed using this Freddie Mac automated loophole?

The 97% 3% is attractive.

I suppose worst case we apply when scores are above 760 and see what everyone can offer?

Best place to check mortgage scores?

Thanks for the help any thoughts?

[ShanetheMortgageMan]

So both Fannie Mae & Freddie Mac automated underwriting systems have the capability of only needing the most recent year of tax returns to calculate self-employment income.  With Freddie Mac the requirement is that the borrower must be self-employed as the same business for at least 5 years, a letter from a CPA or other documentation is needed as proof (since you aren't going to supply all 5 years of tax returns).  Fannie Mae doensn't have that 5 year requirement though.

With either Fannie or Freddie, in order to just need the 1 year of tax returns, it comes down to all of the parameters of the loan application.  Someone with excellent credit will have a better chance than someone with less-than-excellent credit, someone with a low DTI will have a better chance than someone with a higher DTI, someone with more reserves will have a better chance than someone with few reserves, someone with a larger down payment will have a better chance than someone with just the required minimum down.  I've toyed around with these situations quite a bit, and I'd say in order of importance they are DTI -> credit score -> down payment -> reserves.  On a strong credit borrower, I've been able to keep the DTI low and decrease the down payment little by little (do this by increasing the income to keep the DTI at the same level regardless of down payment) and still have received the 1-year tax return finding with as little as 3% down.  It's just a comprehensive analysis of the entire application.  I'd recommend get your scores as high as possible to improve chances.

Keep in mind any income taxes due on the 2019 tax return will need to be paid in full or a payment plan set up and the IRS payment included in the DTI.

Best place to check your mortgage scores is here at www.myfico.com - there is a monthly subscription option that seems like it's the cheapest way to obtain them, then just cancel before the recurring subscription hits (hopefully the FICO lords don't strike me down for suggesting that).  You'll get your actual mortgage scores from all 3 bureaus (+ a variety of other credit scores too).

[Anonymous]

This is an excellent and very comprehensive answer thank you very much @ShanetheMortgageMan!

Once we have 2019 taxes all paid in full we'll work on pulling the 3 scores with a subscription to myfico. We'll pay/keep the subscription as long as there's value add.

From your findings it would seem like she's a good candidate to use 2019 without having 2018 pull down her current income due to averaging.

Fingers crossed!

I'll post back once I have more info to share.

[ShanetheMortgageMan]

De nada

[Anonymous]

She applied and has a PQ letter with a qualifying interest rate of 4%. Is this the actual % we can expect or still to be determined? 

I take it that a letter is helpful for negotiating but if this is the actual % rate we might keep shopping.

What's a polite way to ask these things to the lender?

[Revelate]

---

@Anonymous wrote:

She applied and has a PQ letter with a qualifying interest rate of 4%. Is this the actual % we can expect or still to be determined? 

I take it that a letter is helpful for negotiating but if this is the actual % rate we might keep shopping.

What's a polite way to ask these things to the lender?

---

That's usually accurate other than rate shifts between now and when you lock it assuming nothing changes with the loan.

It's usually a good idea to sanity check with other lenders regardless.

[Anonymous]

@Anonymous I know this post is from a while ago, but just thought I'd check in to see how things went for you as I'll be in a similar situation next year when I hope to buy a house... I have a much low self-employment income from 2018 because I left my old employer to freelance in September, so 2018 is only part of a year's income

[Anonymous]

Hey @Anonymous we are currently waiting on appraisal. It's been tough, and tougher with coronavirus new requirements for self-employed.

We had a preapproval in March pre-lockdowns, tried to go into contract and the bank initially denied us because of the 3 month gap in income.
It didn't matter that even with the 3 months off (working now since June) the income trend (extrapolated through end of year) is higher than it was with the pre-approval. Freddie and Fannie is making them look at monthly income I believe at least the past two months, on top of 2 years (or 1 year income with proof of 5 years in the business)  

I can say they aren't making it easy for self-employed but we satisfied everything they asked for and they gave us initial approval and we are just waiting for the appraisal and closing.

What they wanted to see is consistent deposits into an account to demonstrate solid income. We messed up during the 3 months we made no deposits (even tho we could have) and they saw it as a red flag. Hopefully you're working now and can demonstrate at least 2 months income should help with the new requirements.

I wish I had more info, any questions just ask.