NJ First-Time Home Buyers

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The Wage Earner Home Buyer with the Side Business (Self Employed) - Beware

The Wage Earner Home Buyer with the Side Business (Self Employed) - Beware

Too Many Jobs ManI often take things in this business for granted, thinking most professionals know what is going on in the mortgage market. Maybe I should have shared about this months ago. I guess better late than never.

If you have been paying attention to the documents buyers must offer up to lenders these days, you'll know that most often tax returns (1040's) are required, even for those earning income solely as a wage earner (hourly/salary type position). In the past a mortgage was approved solely on income derived from a borrower's W2's and pay stubs. Lenders did not request tax returns.

These days lenders/investors are pulling 4506's on everyone. A 4506 (4506t) is the form a borrower signs that allows the lender to pull their tax returns. In the past, a wage earner would qualify solely on their "wage earner income"; that is, their pay from their full-time job, derived from pay stubs and W2's. Self employment income was ignored!

As tax returns are pulled on all borrowers, we find that a wage earner may not qualify for a loan if he or she has write-offs from a side business or self-employed business. And we know how self-employed individuals like to write off everything from the new snow tires to the dog and cat (certainly paid employees ... no?)

Doggie AssistentSo if you or someone you know has a solid job with solid pay, and is looking for a home loan, but have a side business - BEWARE. Those write-offs that saved you a buck yesterday can rear their ugly head to deny you a loan today.

 

(AR Members you can read this article which inspired my blog here.)

 

 

 

 

 

 

 


Steve Kappre is a mortgage loan officer in New Jersey with Treasury Mortgage, a subsidiary of Aurora Financial Group. For more info check out:

Contact Steve Kappre directly: 856-419-3561 | Subscribe to Steve's blog via e-mail

Comment balloon 19 commentsStephen Kappre • January 02 2010 12:07PM

Comments

Great information.  I think too often we do not ask enough questions when we first meet a buyer.  Asking the right questions upfront can save everyone a lot of time.  More importantly knowing the right questions to ask is even more important.

Posted by Andrea Kappre, New Jersey Realtor, New Jersey MLS, Homes for Sale in NJ (Old World Realty) almost 9 years ago

Steve - Oh, I'm feeling your pain.  I currently have just such an escrow and it has caused such grief for both me and my clients.  It's been a challenge but if all goes well, we will be ordering docs next week - finally.

Posted by Donne Knudsen, CalState Realty Services (Los Angeles & Ventura Counties in CA) almost 9 years ago

Steve, do you have any advise for self employed individuals to help qualify for a loan?

Posted by Betty Knowles, TeamKnowles REALTORS® - Springfield MO Real Estate (Coldwell Banker Vanguard - www.teamknowles.com) almost 9 years ago

Steve, I did not know that. I typically just send them straight to the lender, and when anyone grumbles about all the documents, well, it sounds pretty normal. Thanks for the update! And, as a matter of fact, I have never written anything off regarding my dog.

Posted by Jane Cross (Homes By Cross serving Charlotte NC Real Estate Needs) almost 9 years ago

Steve,

Any self-employed buyers can require extra efforts, so thanks for this tip. I love my small business owners who cannot document their real income! Creative accounting can bite someone in the butt at mortgage time.

Posted by Irene Kennedy Realtor® in Northwestern NJ (Weichert) almost 9 years ago

Now how the heck did I not know this ?????????

This makes SOOOO much sense and I am just hearing about this now. Very very good info as to why self employed individuals may not qualify for as much as they think.

Very Nice Steve ... I'm reblogging !

Cheers !

Posted by Sheldon Neal, That British Agent Bergen County NJ (Bergen County, NJ - RE/MAX Real Estate Limited) almost 9 years ago

Andrea - No doubt. The more work done upfront the easier and cleaner the transaction for everyone.

Donne - Isn't it so nice to know the same issues arise 3000 miles away? :)

Betty and John - Self employed ... well great credit, great income, and great assets. Other than that, one needs a sizeable down-payment ... say 30-40% if one has to do a stated income loan. If your income is solid and you aren't writing off everything under the sun so that you show $5,000 in income at the end of the year, then really you won't have much issues. You can even have lower credit (620ish) if you can clearly document your income.

Hope this helps, let me know if you need specifics-I'd be happy to help.

Jane - So funny.

Irene - YOU SAID IT!

Sheldon - Thanks for the great gesture.

Posted by Stephen Kappre, Helping You Home (KW Hometown) almost 9 years ago

Steve - Excellent Blog!  A few months ago this was an obstacle for one of my clients.

Posted by Michelle Gibson, REALTOR (Hansen Real Estate Group Inc. ) almost 9 years ago

Hi Steve:  This is very important information to beware of for OUR personal purchases also (as real estate agents and lenders who own our own business)!  I recently purchased a condo that required me to provide tons of income information.  Like many, I use every deduction that is rightfully mine to use but, lenders are far more critical when you're self-employed.  No matter what my income was 'thus far,' they wanted my net from the previous year, and they didn't care anything about what it was before the deductions either!   I almost didn't qualify for another mortgage! 

Funny but, my thought was--did it really save me that much money to bring my income down JUST for tax purposes?  It truly does effect the REST of your life when it comes to getting a mortgage--especially when it's not your primary residence.

Now, more than ever before, since real estate is SUCH a good investment, we need to keep this in mind when filing taxes for 2009-- do we really save that much when we take that deduction?!  I'd rather buy more real estate than take that deduction that may save me a little in the short term!

Have a wonderful Sunday!

Posted by Debe Maxwell, CRS, Charlotte Homes for Sale - Charlotte Neighborhoods (www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310) almost 9 years ago

Good Debe rebloged it. So interesting. I see it too often. People want ot sell their business, and it is a good business, but when you get to taxes, they write off every penny, and how can a buyer get financing for a business, than costs $600K and gives $500 a year profit?

Posted by Jon Zolsky, Daytona Beach, FL, Buy Daytona condos for heavenly good prices (Daytona Condo Realty, 386-405-4408) almost 9 years ago

Interesting post, Steve!  There is quite a bit of information in there that is beneficial to many!  SO many people have side businesses now!

Posted by Leesa Finley, RED Properties - Raleigh NC Real Estate (RED Properties) almost 9 years ago

Michelle - You know first hand then! Next time you can show them the article! :)

Debe - Sounds like a fanastic blog considering the new year. If you don't write it, I might ;)

Jon - Right on

Leesa - Great to be of help.

Posted by Stephen Kappre, Helping You Home (KW Hometown) almost 9 years ago

Awesome post and I guess I would have never realized!  John Occhi is looking for self employed info so you may want to hop over to his post that asks for this ;)

Posted by Renée Donohue~Home Photography, Western Michigan Real Estate Photographer (Savvy Home Pix) almost 9 years ago

Steve ~Great post and you are so correct on this one. Things are tightening up so much that it is more important now that a buyer have all ducks in a row before buying a home.

Posted by Monique Hailer, South West Florida & Southern Maryland Homes (Schooner Bay Realty., Inc. & CENTURY 21 New Millenniun) almost 9 years ago

Renee - Thanks - I'll check John out now ...

Monique - Now more than ever :)

Posted by Stephen Kappre, Helping You Home (KW Hometown) almost 9 years ago

Let's see, I have a home office and my dog is an integral part of my security system there (that's actually true) but I've never taken a dog based deduction. Perhaps I should rethink my tax strategies.

Great info. I'll pass it on to my buyers.

Posted by Julia Odom, Chattanooga Homes for Sale (Select Realty Professionals) almost 9 years ago

Julia - Glad I could help! Say "hi" to rover for me.

Posted by Stephen Kappre, Helping You Home (KW Hometown) almost 9 years ago

Steve, 

Great article. There are so many land mines in getting a mortgage completed these days. The more we inform real estate agents about these landmines, the better off we will all be! I will be posting an article shortly on another land mine that can be avoided if planned for properly.

Posted by Phil Caulfield, I Get The Loans Done That The Big Banks Don't! (Guarantee Mortgage) almost 9 years ago

Steve: Thanks for the post. I too have a nightmare self-employed loan. Heavy losses, trusts, multiple tax returns. Arghhh! Not sure if I can get it approved or if it needs to be brokered to a  portfolio lender. Thanks again. This is very true!

Posted by Paul McFadden, Pest Control, Seattle, WA. (Paratex) almost 9 years ago

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