Self Employment and Home Purchase

Now that the bank statement loans have gone by the wayside because they were abused by some people in the Mortgage Industry, what is the self employed person to do when they want to purchase a home?

Most self employed individuals are smart to take advantage of all the tax write off’s afforded to them by the tax codes, but when you are attempting to purchase a home, you need to balance those deductions with the amount of income required for a home purchase. AND, you need to think about doing this WELL BEFORE the actual purchase comes into play. Why? Because underwriting guidelines for home loans require a minimum of 2 years income history. If you wrote your income way down one year, and the next you showed fewer deductions and a higher income, that won’t work. Underwriter’s will average the two years and divide the total by 24 months.

Let’s say you want to purchase a home for just under $200,000. You will put 5% down, and you have a current market interest rate. Your payments, including taxes and insurance may be around $1,300 per month. In most cases, that could be less than what you might be paying for rent.

Now let’s suppose you only declare a yearly income of $25,000. You have a $400 per month car payment, credit card payment totalling another $100 per month. At $25,000 per year, your monthly income would be calculated as $2,083. Even without the car payments you won’t qualify for the mortgage. The underwriter is going to take the $1,300 per month and see that your debt to housing expense is 62%. Most underwriting guidelines won’t go higher than 40%. Now if you add the other payments on to the housing expense, you ratios of income to expenses is WAY too high.

A declared  income of around $38,000 would be more inline with what it takes to qualify for a home loan with the car payment and other debt. Keep in min these figures are for illustrative purposes only, you can’t use them for pre-qualification planning. You will need to come in and let us review your tax returns for the past couple of years, and your current gross income before we can give you actual numbers.

Real Estate Prices have been inching up, but rent prices have gone way up, so it might make much more sense to purchase a home than it does to continue to rent. Again, the figures quoted here are for illustrative purposes only, we won’t know the real story for you until we have met and gone over all of the numbers.

Make an appointment we will begin your plan!!

Pete DiSalvo

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