Self-employed buyers with business returns

Now, let’s have some fun!

Whether someone is a sole proprietor, in a partnership, or part owner in a corporation, business returns will be filed and used for the loan qualifying process.

This is often when I hear phrases like “I pay myself a W2, so I’m not self-employed“…. or “I‘m not self-employed because I do not fully own the company.”… Those are valid statements, so what makes someone self-employed:

• If a buyer owns 25% or more of the company, they are considered self-employed.
• This means regardless of how they pay themselves (W2, K-1, draws, year-end bonus, etc.), both business and personal tax returns are reviewed to qualify for the home loan.

Now when we know someone is self-employed, always provide the business returns. Let me repeat this… always provide the business returns! I’ll share a case study later this month where the business return allowed a client to close on a home loan who was denied by another lender!

When reviewing a business return (1120S, 1120, 1065, etc.), the itemized deduction section does look similar to the categories of the Schedule C of a personal tax return. Meaning, the deductions come off of the gross income just like with a Schedule C. When reviewing the business returns, I’ll look for the following:

• Any money being paid the the buyer through a W2?
• What are the bonuses? K-1 payments?
• Are there any deductions for depreciation and depletion? If yes, I can add those back into net income!
• Does the net income reflect as expected on K1 forms based on the percentage of ownership someone has in the company?
• Does all the income roll over to the personal return?
• There are a couple of other things I check, and I’ll get into those next week in my Q&A style post.

Again, it does not matter how someone pays themselves (W2 only, distributions only, both of them, etc.), I take the total income and divide out by the 12 months. Just like with a Schedule C, the guidelines are the same:

• if a business is less than 5 years old at the time of application, two years of tax returns are used for qualifying. If the income declines from one year to the next, it could be problematic.
• if a business is more than 5 years old, only one year of tax returns is needed.

Take the number, divide by 12 months (or 24 months if two total years of returns), and now I have qualifying income for the loan. This is when the loan process gets easier as we now have qualifying income, and can move forward with the rest of the loan process.

Again, always provide business returns if filing both personal and business returns. Next week I’ll touch on a few things, which can make or break a deal found in the business returns.

Filing multiple returns each year? Feeling overwhelmed? No worries,  contact me today. I can help! Together, we’ll go through both returns, find out your qualifying income, and make sure there isn’t anything in the return that can cause major issues during the loan process.

Self-employed buyers using a Schedule C

April 15th is behind us… returns are filed (or at the very least, extensions are filed)… and now we turn our attention to qualifying for a home loan when self-employed.

Buyers who are W2 salaried have it easy as calculating and documenting their income is simple. Not so with self-employed buyers. This month, we’ll take a deeper look into the realm of those who are self-employed and wanting to buy a home.

This week – those using a Schedule C form.

Whether someone is running a small business, formed an LLC, promoting MLM products, or simply a 1099 employee (and yes, 1099 employees are considered self-employed), the easiest way to file taxes is using a Schedule C and doing business and personal returns on the same tax return.

The biggest misnomer out there when I speak with someone who is self-employed is the amount of money they earn. When looking at a Schedule C, many people give me the number on Line 1 of the form. This is their gross receipts or sales… gross income. I’m looking for net profit/income. This is Line 32 of the form. When speaking to a loan officer, the number at the bottom of the form will be used for qualifying purposes. This is the number with all deductions removed.

Some of the deductions can be added back to a buyer’s income. For instance, depletion and depreciation can be added back. On the 2023 Schedule C form, these are lines 12 and 13.

In short, take Line 32 of the Schedule C, add back the numbers in Lines 12 and 13 (if any), and divide this by 12 months. Now we have monthly qualifying income.

The next step is determining how many years of tax returns are needed. In previous years, Fannie Mae allowed for one year of tax returns, but this is no longer the case. Both Fannie Mae and Freddie Mac operate under the same guidelines:

• if a business is less than 5 years old at the time of application, two years of tax returns are used for qualifying. If the income declines from one year to the next, it could be problematic.
• if a business is more than 5 years old, only one year of tax returns is needed.
• meaning new businesses will need to be two years old before the owner qualifies to purchase a home using a conventional or government loan.

And there we have it… we now know how self-employed income is calculated for those filing using a Schedule C on their personal returns. We also know how many years of returns are required. In the coming weeks, we’ll look at self-employed buyers who file separate business returns followed by a Q&A type post with an assortment of things to be aware of when purchasing a home as a self-employed buyer.

Run your own business? Want to know how much income you have for qualifying purposes? If so, contact me today. We’ll go through your tax returns, calculate your qualifying income, and see your purchase price. I’ll have you ready to make offers in no time!

A home buying journey

As we’ve heard on the news, read on the internet, and on this blog, home affordability is tough right now. Statistically, it could be one of the hardest with home values at all-time highs, mortgage rates off their all-time lows, recent high inflation, and wages not keeping up with all of these trends. 

I’ve been reminiscing over my own home buying experiences, and even though home values were not as high as they are now, I remember experiencing similar struggles. Here’s a little of my own story…

It’s 2005, during the housing boom, and it was a “great time to buy” as “everyone” was purchasing a home. I joined the crowd and quickly discovered I struggled to afford anything where I was renting. Over the course of several months, I went under contract three times, and all three fell through for issues with home inspections. It was frustrating spending money on home inspections and appraisals I never used. I decided to take a break from looking at homes. 

Fast forward to May 2006, I began searching for homes again. This time, I looked even further out and at town homes and condos as they were cheaper. I did go under contract on a town home, and thankfully, no inspection issues. Even though I felt I was over paying, by this point, I felt like I had to make this home work. I did purchase the town home, and moved 10+ miles away from where I currently lived.

We all know what happened in 2008 with the beginning of the housing crash. Condos and town homes lost even more value when compared to single family homes. At one point, my town home lost 80% of its value. I remember my 2012 property taxes being less than $100 because my county assessed value was so low. 

Let’s jump forward in time to late 2012… the housing had yet to recover. People were saying it is a “bad time to purchase a home” because the value would just drop. Still, I did purchase a new home in early 2013 while holding onto my town home for many more years hoping its value would recover. By the end of 2014, home prices stabilized and began climbing again. I did sell my town home in 2018 for a small loss, but not the 80% loss it once showed on paper.

I feel the point of my story is there is never a perfect time to buy a home. Timing the market is impossible. I bought when “everyone” was buying and was a “great” time to buy. Turns out it wasn’t… and then bought when people were saying to not buy because prices keep falling, which wound up being a good time to buy.

When is the right time to buy? As I said last time, when you know you will be in the area for several years to allow for some appreciation – while also taking advantage of tax write offs (property taxes and mortgage interest) – this, in my opinion, is the time to buy a home.

I know the market is hard and especially for first time home buyers trying to get into the market. I hear from clients today about the housing market, and I too remember being in a similar spot. I hope this story of my own journey provides some encouragement.

Whether you are getting ready to start or continue your home buying journey, contact me today. I’ll help you develop a plan, strategy, and next steps toward getting you into that new home!

Home values continue to rise

Normally when home sales slow, prices slow too… sometimes prices go down. The housing market continues to buck this trend. Per the S&P CoreLogic Case-Shiller US National Home Price index, home values increased 6% from January 2023 to January 2024. This follows an over 5% increase year-over-year from December. This makes two months in a row with cities across the US reporting annual price increases.

I’ve covered reasons why home values are still climbing even with the decline in total number of sales. The quick version is some combination of the following:

• owners wanting to hold on to very low mortgage rates,
• fear of selling but not being able to find a new home,
• Boomers staying in their homes longer/not downsizing compared to previous generations,
• higher mortgage rates,
• all time high on home prices,
• years of under-building with new construction

All of this has led to a shortage of millions of available homes for sale across the country.

The current housing market is and continues to be a challenge. It can feel daunting… like climbing a mountain and coming over a hill just to see more of an uphill journey.

What should buyers do? It’s a tough question.

It seems as is the inventory challenge won’t lift for several years. While some say home values should flatten or drop, will they? I mean, the US is still dodging a recession many experts claimed was coming the past few years. Also, values dropping could be regional. For example, while home prices fell out west (double digits drops in some areas), home values continued to rise in metro Atlanta.

What is my advice to clients? It is the same as it has always been… if you know you plan to be in the area for several years, owing a home and getting the appreciation that comes with owning this home is the better way to go. It feels like home values won’t drop by much (if ever) in metro Atlanta, and it is easier to refinance once you are already living in the home instead of competing with more and more buyers should mortgage rates drop. Buying now is still the way to go if the plan is to be in the home for 3+ years.

Plan on living and working in the state of for the next several years? Want to get pre-underwritten allowing you to make a strong offer? If yes, contact me today. I can get you prequalified today, pre-underwritten ASAP, and ready to make offers on your new home!

Condos and insurance

Last week I discussed some deal breakers/challenges when purchasing a condominium. Today, let’s talk about condo insurance. I know people want to save money as everything seems so much more expensive these days. It is easy to find cheap HO-6 policies (condo policies) online, yet I don’t recommend it.

One of the most confusing things when it comes to insurance is matching up a buyer’s own personal HO-6 policy with the master condominium project policy. Some of the master policies have larger deductibles that could create a gap in coverage. Some insurance companies may pay these deductibles out of the Dwelling coverage on a homeowners HO-6 policy. Other insurance companies may require this to be a specific line item/addition to the policy (just like extra coverage for jewelry).

Given the potential gaps in coverage with the master policy and a basic HO-6 policy, the fact different insurance providers pay out differently in terms of claims, and having sufficient coverage in general to protect one’s belongings, I cannot stress enough how important it is to speak with an actual insurance agent versus typing in data into a website. The premium may be higher, but insurance isn’t any good without the correct coverage.

Spoiler alert – I am not an insurance agent. I am not licensed or experienced to talk about all the ins-and-outs of policies. This is why I’m encouraging anyone buying a condo to speak with an actual agent. I will go into one very common misnomer about a condominium master policy.

Everyone knows the master policy is there to rebuild the unit in the event of a total loss. Heaven forbit if a condo building were to burn down, the master policy will reconstruct the building. What many do not know is the policy only puts the home back to its original design. Meaning, if an owner has put in hard wood floors, granite countertops, etc., and the original build was carpet and laminate countertops, the owner is responsible for the money needed for the upgrades made on the unit.

This is where the homeowners HO-6 policy comes into play. Not only does the homeowners’ coverage replace their belongings (appliances, electronics, clothes, etc.), it also provides money for the upgrades/renovations done to the home. Again, this is why one needs to speak with an agent to make sure there is adequate coverage to pay for all these things.

The moral of the story – when buying a condo, speak directly with an agent to ensure adequate insurance coverage.

Buying a single family home, townhouse or condominium? Doing it in the state of Georgia? If yes, contact me today. I can get you ready to make a strong offer on your next home!

Differences when buying a condo

Buying a home comes with challenges. If you want to take the challenge up a notch, purchase a condominium. When buying a home, the borrower always needs to be approved in terms of credit, income, assets, etc. When purchasing a condominium, the project itself also needs to get approved.

There are a few things that can stop approval of a condominium regardless of how well qualified a buyer may be. Let’s discuss a few of those. Remember, this is only for a home considered to be a condominium. If someone is purchasing a single family home, none of this applies to the approval process.

• Operating Budget: The Home Owner’s Association (HOA) budget must save 10% of the annual budget to reserves/savings. No exceptions. If the annual budget is $600,000, then $60,000 (or more) must be put into reserves.
• Litigation: Is the HOA named in a lawsuit? This can be problematic depending on the nature of the suit. It isn’t necessarily a deal killer; however, it is definitely a hurdle to get past!
• Ownership: If one individual (or entity) owns 10% or more of the units in a project, the project will not be approved.
• Delinquency: Are 15% or more of the owners in the project delinquent on their HOA dues? If yes, this can also cause a problem until the delinquency rate is reduced.
• Mixed Use Buildings: if too much of the square footage of a building is dedicated to commercial space (think businesses on the first floor and residential on top), this will also be a problem. The current guidelines have commercial/mixed-use space capped at 35%.
• Investment Properties: if more than 50% of the total units are rented out as investment (non-primary residence or second home), this is also likely to lead to a denial.

None of those points even gets into the additional information condo projects need to provide in terms of structural, safety, repair issues stemming from the condo building collapse in Florida in June 2021. I am not downplaying/glossing over the tragedy of that day/complaining about more guidelines. I’m simply saying this horrific event added more to getting condo projects approved.

What should buyers who are interested in purchasing a condo do? I suggest getting as long of a financing contingency as possible for the approval of the condo project itself. If a buyer is thinking of waiving the financing contingency, then they should speak with their agent about adding a special stipulation to the contract protecting their earnest money in the event the condo project ultimate is not approved.

I close lots of condos, but they can be challenging. Protecting one’s earnest money and doing some research on the project prior to making an offer is the way to go as unexpected things happen.

Are you in a position where you don’t know if a will be approved? If the condo is in the state of Georgia, contact me. I can help coach you on things to request/review to see if it is likely a condo will be approved and map out the best way to proceed toward buying the home.

Area Median Income (AMI) loan programs

Last week I touched on a new down payment assistance grant Fannie Mae and Freddie Mac rolled out. This program is connected to Area Median Income (AMI). This $2,500 grant isn’t the only loan program out there tied to AMI. Let’s discuss the others!

First off, to qualify for anything listed below, the applicant must be at or below 100% of the area median income (AMI), which is mapped out to the street level. Meaning, it is different all over the country. Fortunately, there are online lookup tools for AMI. Fannie’s can be found here, and Freddie’s here.

For most of metro Atlanta, the AMI is $102,900. Qualifying at 80% of this threshold is $82,320, and 50% of this number is $51,450. With those details out of the way, let’s jump into the options.

100% of AMI:

Buyer’s whose qualifying income is at or below $102,900 but higher than $82,320 would be eligible for a better interest rate. To qualify, the buyer must be a first time home buyer (FTHB). The definition of a first time buyer is anyone who has not owned a home in 3 or more years. Those who qualify have the Loan Level Pricing Adjustments (LLPAs) waived. Essentially, credit score adjustments are waived. LLPAs also include other things such as the adjustment for purchasing a condo, which is a pretty significant adjustment.

I’m working with a client now who earns over $103,000 in total compensation. Their base income is below $102,900, and they qualify just on their base income. Since these AMI programs use qualifying income only, I had them apply for the loan using just their base income. This allowed us to waive all credit score adjustments. Since the home is a condo, I got to waive this adjustment too. Removing these adjustments allowed my client to get an interest rate 0.375% lower than it would have been otherwise!

Again, this is for actual First Time Home Buyers (FTHB). The next two are for anyone as long as their qualifying income is under the different thresholds.

80% of AMI:

This is where HomeReady (Fannie Mae) and HomePossible (Freddie Mac) come into play. Not only are credit score adjustments waived (as described above), the rates on these programs are better than the rates on a normal 30 year fixed loan. Qualified buyers will see a big improvement on the interest rate, and even more so if purchasing a condo.

As previosly stated, this is qualifying income. If an applicant gets base + commission and only need their base income to qualify (even if they barely qualify), this is the route they should take as the interest rate is noticeably different from a normal 30 year fixed rate loan.

Reminder… anyone can use HomeRead/Home Possible as long as their qualifying income is 80% or less of the AMI.

50% of AMI:

Again, any buyer can use this as long as their qualifying income is 50% or less of the AMI. This is the program I discussed last week. Buyers get the benefits of the HomeReady and HomePossible programs (as described above) along with the $2,500 grant. For more details, see the full post from last week.

And there they are! All the programs tied to Area Median Income (AMI). The Federal Housing Finance Agency (FHFA) uses these programs to help true first time buyers (who have the highest allowed income threshold) and all lower income qualifying buyers get into market to own a home. Regardless of what some may say on social media, home ownership is still a goal of a vast majority of people. The FHFA is using this to help those who need it get started on their home owning journey.

Wondering if you qualify to use one of these programs? If you are looking to purchase in the state of Georgia, contact me today. We can discuss your income and scenarios to make sure you take advantage of everything available to you!

Down payment assistance with HomeReady and HomePossible

Fannie Mae and Freddie Mac introduced a new enhancement to their HomeReady (Fannie) and Home Possible (Freddie) programs. The enhancement targets those the Federal Housing Finance Agency considers to be Very Low Income Purchase (VLIP) borrowers. HomeReady and HomePossible buyers who qualify will receive a $2,500 credit to use towards down payment and/or closing costs.

To qualify as a very low income purchase borrower, the applicant must have an income at/below 50% of the area median income (AMI). There are online lookup tools for area median income. Fannie’s can be found here, and Freddie’s here.

A couple of notes about HomeReady and HomePossible:

1. Buyers do not have to be considered a first time home buyer to use the program.
2. Qualifying income is used to determine eligibility. For example, say someone’s base salary is $50,000 a year, and they also receive $20,000 in overtime. If they qualify on just the base income, then they would be eligible for the $2,500 grant.

Area Median Income is zoned out to the street level; meaning, it is different all over the country. For most of metro Atlanta, the AMI is $102,900. To qualify for HomeReady or HomePossible, buyers need to be at 80% of this amount, which is $82,320. To qualify for HomeReady/Possible and get the grant, qualifying income is at 50% of the AMI, which is $51,450.

An example of qualifying for the grant would be someone purchasing a $260,000 single family home with 5% down. An estimated payment could be $1980. This would leave some room for other debt as well. While a majority of buyers out there will not be able to use this grant, it isn’t impossible to qualify for it either.

There are some other programs for buyers at or below the 100% AMI threshold, and I’ll touch on everything next time!

For now, if you are looking to purchase in the state of Georgia, contact me today. We can go over first time home buyer programs along with HomeRead/Possible and see what all you may qualify to use.

Student loans and buying a home

It’s pretty easy to find articles about student loans and home buying. Yet, at times, challenging to separate truth from reality. How are student loans evaluated when purchasing a home?

Student loan debt is treated like most other debt when getting a home loan. The total balance is not evaluated. Lenders are concerned with the monthly obligation. A would-be homebuyer could have $100,000 total in student loan debt, yet when applying for a home loan, a lender wants to know “what is the required monthly payment?”

Conventional loans use the payment listed on the credit report for qualifying purposes. They’ll use the payment even if it is not a fully amortized payment, and even if the payment is $0 as part of an income-based repayment plan.

If a student loan is in deferment, then an estimated payment is calculated by taking 0.5% of the balance. Using $100,000 as a more extreme example, a deferred balance of $100,000 would result in a qualifying payment of just $500. Most clients I speak with have balances below $50,000, so a deferred payment would be just a couple hundred dollars.

Even when all student loans were in deferment during COVID, a qualifying payment was being used by calculating 0.5% of the balance. Meaning, even though the payment was not required, buyers were still qualified with a payment. Now with student loan payments being required, it’s not as big of a difference as some may think.

Often student loan payments do not have the dramatic impact for someone qualifying for a home loan. The most challenging thing for buyers is it is simply one more thing they have to deal with in the process. Inventory is still a challenge, home prices are higher, rates are higher, and home affordability is worse now than it was during the peak of the housing bubble.

Even though down payments can be as low as 3%, this amount needed for the down payment is higher due to the increase of home values. Then throw on closing costs, possibly waiving contingencies when making offers on a home, and perhaps going over list price to win an offer. It is still a tough time for buyers.

Sadly, this is the reality of the current housing market. Let me help you prepare for it. If you are looking to purchase in the state of Georgia, contact me today. We will discuss all aspects of preparing, planning and getting ready to make the process as easy as possible in the tough housing market.

Buyers are back due to lower rates

Interest rates dropped tremendously from their 2023 high back in October. Rates went from just over 8% back into the low/mid 6s by December. Rate are still holding in this range, and buyers are back out looking at homes.

The Spring Market is starting early in 2024. There is so much pent up demand due to home buying needs/decisions being pushed off from 2023. There are already signs of a heated market again.

Last week a client went to look at a home, fully renovated, and on the market two days. By the time my client went to view the home, it had multiple offers including some over list price and waiving contingencies. This was reminiscence of the 2020-2021 home buying experience.

Currently, buyers are more optimistic now when it comes to buying in 2024 versus 2023 with rates down so much from their most recent high. Couple this with the expectation rates will continue to improve during 2024, and we are likely to see more buyers entering the market. This could result in another extreme seller’s market where homes receive many, many offers.

Beat the crowd. Go out and look now as it feels the market will only get more challenging as we move further into 2024. If you are looking to purchase in the state of Georgia, contact me today. I can can get you prequalified quickly and pre-underwritten so sellers will know your offer is already approved pending the appraisal and clean title!