Let me start off by saying that the cliché “you can’t have your cake and eat it” can be modified when it comes to buying real estate. How, you ask? It’s very simple. We all know that the goal from a tax perspective is to pay the least amount of taxes legally. Generally, most business owners and entrepreneurs try to write off as many expenses against income as they can.
If the business is very healthy and generates wads of cash, even though you might write off expenses, you still might show a hefty profit, and if you do, then you have the probability of getting a conventional mortgage as long as you have enough income to qualify and an acceptable credit score, which would be a clear case of having your cake and eating it too. What if you grossed wads of cash, but wrote off a ton of expenses reducing the net income you need to qualify for a mortgage? The good news is, in the latter case, you can still have your cake and eat it, but … it costs a little more.
My financial background started as a CPA, then getting my real estate brokers licenses in New York and New Jersey doing commercial deals, and starting my mortgage company from below the ground up, so I have a special affinity toward entrepreneurial business owners and the self-employed. I love putting challenging deals together, of which there are many.
There are many mortgage products that can accommodate and meet the needs of self-employed borrowers, and if you thought that you needed tax returns to get a mortgage the good news is you don’t. The catch? You need a better credit score, more down payment or equity, and the rate is higher than a conventional mortgage, but you can still get the cash you need to buy or refinance a home. Afterward, and if the market justifies refinancing, you can refinance out of the higher rate when you have the qualifying income and/or credit score.
Why wouldn’t a person have tax returns? A businessperson may not have finished their “books” to delay paying taxes owed, no access to records due to accountant change, relocation and divorce. A person may have tax returns but will not qualify with the income shown.
Underwriting guidelines have to be met in order for mortgage lenders to sell your loan after you close to the mortgage buyers on the secondary market. If you fit into the underwriting sweet spot box, you should qualify easily. Sometimes though, you may not have the documentation needed for a conventional loan.
Alternative lending, aka NON-QM lending in the mortgage world, refers to mortgage financing that falls out of, or is more flexible than, the conforming criteria. Dodd-Frank was passed in 2010 and a whole bunch of compliance and regulatory laws changed the mortgage products available. In the last several years, the market has changed, and old wounds have healed. That healing has brought about new mortgage financing products and a financing opportunity for those borrowers who are recovering and who have recovered from the real estate market downturn.
Some of the new products utilize bank statements only, allow for lower credit scores, shorter waiting periods between financing and financial housing events (deed in lieu, foreclosure, bankruptcy), and higher debt ratio calculations (total debt figure and divide it by your income). There is even a no income stated product for those who want to buy or refinance a primary residence. Use and occupancy of the property is considered by lenders in determining the selection of alternative, no tax return, programs available.
To give you an idea of what is available for those “out of the box,” borrowers see below:
DSCR: Debt service coverage ratio program for one-four investment properties. This is ideal for borrowers who prefer not to use DTI criteria or are unable to qualify using conventional financial documentation loan requirements. This is based on reserves, payment history and credit depth. Typically, a qualifying calculation historically used for commercial properties is now a common way to qualify one-four investment properties. Net operating income divided by total debt equals. DSCR.
Alt-Doc (Alternative documentation): This qualifies homeowners using non-traditional documentation to determine qualifying income. It is ideal for borrowers who do not meet traditional documentation requirements but want the chance to qualify using flexible alternatives.
The following flexible documentation can be used: 1099 only, W-2 only, one year tax return.
Bank Statement Program: I happen to love this program. Many times lending doesn’t make sense, but in this particular case, it actually makes a lot of sense. The banks look at the monthly deposits that the business generates and use an industry based expense factor to arrive at net income. There is no income verification mortgage for primary residences and second homes only (not available in all states). Highlights include:
- Employment is not stated on the application
- Income not stated on the application
- Income documentation not required
- Primary residence and second homes
- Asset seasoning 30 days
Profit and Loss Program: For owner occupied only. Documentation for self-employed: a 12-month unaudited P&L from a tax preparer. Supporting bank statements not required.
Now go get your cake!
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. and www.mortgagegenius.com. He is a real estate mortgage banker and business financing expert with over 35 years experience. He currently has 214 5-star reviews on Zillow. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com; [email protected].
