Getting a mortgage for a NY home is not as difficult as you think. Assuming you qualify for a mortgage, it’s just a matter of being prepared, going through the process step by step and being in sync with your team.
For self-employed mortgage applicants, however, there is more scrutiny from lenders. Therefore, self-employed applicants should understand how to present themselves in the best possible way.
The most important thing to do is file your income taxes as early as possible. Most self-employed people extend until the bitter end and then file. But, if you are buying a home and getting a mortgage, you need to prove your income. The best way to do that is with your tax return.
If you take a salary and also get pass through (owner’s) income, then you want to add up your W-2 and K-1 to calculate your income. If the K-1 shows a loss, that will be used in the negative. Have a conversation with your tax preparer and share with them that you are planning on getting a mortgage. Remember, you qualify on the net income. You want to be mindful taking lots of deductions and expenses. All these items (albeit lower your tax bill) reduce your income used to qualify.
While a lender will look at the bottom line, they will also look at trends. Has your income increased or decreased in the last two years? This is important to know as most people assume lenders average the last two years’ income, but they do not. If your income increased by a large amount, a lender will ask for an explanation of why it is so much higher and if it will continue. If it was just a one-shot deal, a lender might not use that year’s income and will only go off the previous years.
For example, Robert D, a travel agent in NYC, left the corporate world and has been self-employed for more than five years. His income was pretty consistent until 2014 when he landed a great contract with a Wall Street firm to do their corporate travel, which resulted in a great year. When the underwriter reviewed the file, he questioned the source of the unusually high income and required a letter of explanation from Robert and supporting documents. He explained that he had signed on a large client and provided a copy of the service contract outlining the terms and time frame. Upon the review, the underwriter determined that Robert was going to at least gross the 2014 income or higher over the next five years and approved the loan based on that income.
On the flip side, if the income decreased by a large sum, lenders will most likely use the lower amount. So, you want to make sure your income is consistent and hopefully goes up, but not too much. Otherwise, you will have to explain the inconsistency.
Here’s a tip: If 2015 was a banner year and 2014 was not so great, you can apply for a mortgage with showing only the latest year’s proof of income. You need to prove that you have been self-employed for more than two years, but are only required to show one year’s income. Make sure to tell the loan officer that you only want to show the most recent year and make sure you only sign the IRS Form 4506-T for a one-year review. (Note: Check both of these twice to guarantee the loan officer is making sure this happens.)
Next, we have Susan who is a therapist working out of a small office on the Upper East Side. In 2014, she didn’t make as much as she usually does because she had some family issues and also lost a few clients. In 2015, Susan was back on her feet, had an increase in the number of clients and had a good year. This year, Susan decided to buy a home and needed a mortgage. In order to qualify, the lender suggested she only submit the income for 2015 and they would qualify her based on that. She normally doesn’t file her returns until October and frankly, her documents were a hot mess! But, given no choice, Susan spent two long weekends at home sorting out documents and receipts and brought everything to her accountant two weeks ago. Last week, she reviewed the returns and walked them down to the IRS office to file them and get an official receipt. She owes some money and paid it right there. Her loan was submitted with the 2015 income and was approved! Susan is now waiting for the appraisal to come back and hopefully closing in the next 30 days.
All lenders will verify the income disclosed on the loan application. To do this, you need to sign an IRS Form 4506-T, which authorizes your lender to order a copy of the transcript. It is basically a summary of your tax returns, which they compare to the ones submitted as well as the income you stated on the loan application. They will not only look to make sure the income matches, but they will also review items such as number of dependents, expenses that were not reimbursed, other real estate property expenses and other stuff that you may not have disclosed on the loan application. Make sure to tell all, as lenders will find out anyway and nondisclosure is reason for rejection.
All lenders require that the transcripts be reviewed prior to closing. Your tax returns must be filed to do this. After you file your tax returns, it may take weeks for the IRS to post them in the system. If they are not in the system, they cannot be verified and the lender will not use the income for any year which hasn’t been verified.
However, there is a workaround to this rule. Some lenders will allow the borrower to physically go to the IRS office and hand in the returns in order to receive an official stamp showing “received” by the [particular] office and the date. This makes the return “official” even though the transcripts cannot be obtained, and the lender will allow the income to be used. This will avoid any delays in getting the loan approved based on the income and closing!
To conclude, if you are self-employed, you will need to verify your income for the previous year by way of verified tax returns. If you want to go by only the most recent year, instead of showing the last few, you can do that. Just tell the loan officer in advance and make sure they will allow it. If you don’t have your returns filed yet, get everything over to the accountant and ask them to do your returns. You will review them and then walk them down to the IRS office and get a receipt so the income can be used to qualify for your loan. Lastly, if you owe any taxes, you will have to show the canceled check as proof that you paid them.
(Featured image by Chris Conrey via Flickr Creative Commons)
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