It is important to keep in mind the differences between the qualifications of a self-employed borrower and a salary / hourly paid borrower. I ran into the following scenario a few months ago, so make sure you are VERY communicative, open and completely transparent about your business when talking to your loan agent. And it is very important to be a PRELIMINARY APPROVAL by the lender before you start your property search or refinancing. Always remember that your loan agent is on YOUR side and providing as much information as possible can be very helpful in this process:
My client mentioned to me that he was self-employed for over 20 years, but he changed his registration status as an individual entrepreneur (Schedule C on personal tax return) to S Corporation in 2021 after filing 2020 returns as his only props. This was NOT a problem many years ago. However, after checking with Fannie Mae and Freddie Mac, it was decided that they would NOT be allowed to receive self-employment income from businesses whose tax reporting structure has changed … until they have verified 12 months of income by filing the next tax return. … This may sound a little shocking, especially since nothing remarkable about business has changed other than the tax structure. And for clarity, since most lenders sell Fannie and Freddie, ALL of these lenders will get the same result. So make sure that even if YOU feel there should be no problem, it would be wise to consult a professional before moving on!
There are a few other things to consider when considering pre-approval for self-employed borrowers:
If your company has been in business for 5 years or more, you MAY be eligible to use ONLY 1 year tax returns (which can be a huge advantage in most cases). Otherwise, the lender needs 2 years of taxation and will average the net profit of the corporation IF the last year is longer. If the previous year was higher, the TOT (lowest year) will be used to determine income.
If you are paying yourself a W-2 salary through a corporation, it is prudent to be in strict compliance with that salary. Consider this: In 2019, a corporation paid you a $ 60,000 salary and a corporation’s net income. was $ 50,000. In 2020, the corporation paid you a salary of $ 30,000 and the net profit of the corporation. was 70,000 dollars. The lender will qualify you as follows: 1) First, the lender will want to know why such a significant pay cut 2) The lender will ONLY use the $ 30,000 salary 3) In addition, the lender will AVERAGE net income of $ 50,000 US and 70,000 US dollars. net profit of $ 60 thousand. Thus, the total income will be 30 thousand dollars + 60 thousand dollars for 90 thousand dollars. Although in 2019 and 2020, these amounts were 110 thousand and 100 thousand dollars, respectively! This is why it is VERY WISE to consult a VERY experienced loan officer when you are considering restructuring!
Kurt Kravitz is a 35-year loan officer who is very experienced in helping self-employed borrowers achieve their goals! Call him at 661-705-2500. Option 1.