Archive for November, 2018

Self-Employed Home Buyers – Helpful Loan Options

November 21, 2018


When obtaining a mortgage, self-employed home buyers face more detailed underwriting scrutiny regarding their income.  Conventional loans require analysis of the borrower’s net income as shown on their tax returns.  This can cause two challenges to self-employed buyers.

Firstly, underwriters compare year to year tax returns.  An income decline can cause loan denial.  As an example, one of my clients flips houses.  He wanted to buy a house in early 2016.  His 2014 tax return showed strong income.  He planned to sell two flipped homes in December 2015, but they were delayed about 3 weeks – until January 2016.  The income from those home sales did not appear on his 2015 income tax return.  Therefore, his income declined from 2014 to 2015, and he could not win conventional loan approval at that time.  He had to wait 12 months.  Then we won loan approval using a strong 2016 tax return.

Secondly, underwriters use the net income after business expenses to qualify a self-employed buyer.  Smart business owners expense as much as possible to lower their tax payments.  But the greater their expenses, the lower their net income, making it harder to qualify for a higher priced home loan.  Conventional loan underwriting guidelines work directly opposite to smart business tax strategy.  That can make it hard to qualify for the desired home.     

We can solve these problems by using a non-traditional mortgage that defines income using bank statements.  The underwriters determine income based on the statement deposit history.  The underwriters can specify income using 12 months of personal bank statements or 24 months of business bank statements.  Only 100% company owners can use business bank statements.  Qualifying for this loan requires that the borrower has been self-employed for at least 2 years.

So what’s the catch?  First of all, these loans typically require a 10% down payment – no 3% or 5% down loans.  Also, these non-traditional loans carry higher interest rates than traditional loans.  The borrower must decide if the higher interest payment is worth buying the house now.  For someone with significant tax write-offs, it may make sense to continue saving tens of thousands in tax payments in exchange for spending a little extra per year on mortgage interest. 

Do you know a self-employed friend or family member who wants to buy a home?  If you do, please connect them with me.  I will evaluate their ability to qualify for a traditional mortgage, and we will go that route if possible.  If tax savings or declining income becomes an obstacle, I can work to put them into a home sooner rather than later using a non-traditional loan.  With home prices and traditional mortgage rates rising, it may make financial sense to go ahead and buy now.

 

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Credit freezes are now free!

November 1, 2018

A new law recently took effect allowing consumers to freeze and unfreeze their credit with the three main credit bureaus – Equifax, Experian and TransUnion. The push for this changed started in 2017 with the the massive data breach at Equifax, which exposed the personal information of more than 145 million consumers to hackers.

What is a credit freeze? When a consumer “freezes” their credit, they have essentially locked their credit. No one (not a person, bank, car dealership, etc.) can access a consumer’s credit while frozen. This means new credit accounts cannot be opened, and is the surest way (not a 100% guarantee) to prevent fraud. Freezes can become problematic when a consumer needs to apply for credit as one has to go through the process of unfreezing their credit before applying.

The change was put in place by the Economic Growth, Regulatory Relief, and Consumer Protection Act signed into law earlier this year. Before the change, every state had their own rules about credit freezes. It could cost as much as $10 to freeze (and throw on another $10 to lift a freeze) one’s credit. The days of fees are gone. Some other highlights of the new law:

  • As discussed, consumers can now freeze and unfreeze their credit for free.
  • Parents can put a freeze on their children’s credit for free (applies to children under 16).
  • Guardians, conservators, and those with a valid power of attorney can also get a free freeze for their dependents.
  • Fraud alerts placed on a consumer’s credit file will be extended from 90 days to one year.

It hopefully just got a little more difficult for scammers to abuse someone’s credit information! How to put a freeze on your credit? Consumers must contact each of the three major credit agencies independently to place a credit freeze on their accounts.