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Archive for stated income

Tax Savings Could Cost You Your Home

The expenses that you write off on your taxes could keep you from getting a mortgage.

The entrepreneurial spirit is one of the finer points of our society.  The fact that we live in a country with so many freedoms to carve your niche in the marketplace is a beautiful thing.  But that American dream of self employment can also cause you to loose another American dream, the dream of home ownership.

You may have heard the term “stated income” loans.  These are loan programs that were designed for self employed people that had difficult to document income, or they had significant write offs on their tax returns that prevented them from qualifying for a home.  With stated income loans, you were allowed to “state” your income without documenting or verifying where this income came from.  It was a simple solution for some people with good credit and good assets to qualify for a loan even if they could not prove their actual income stream.

With this loan program also came abuses of the system leading to desperate borrowers overstating their income to qualify for their dream home.  Or, unscrupulous loan officers that would do anything to get the deal done.  Regardless, many home owners bought homes that they could not afford, and you have seen the aftermath that was caused.

So, now that stated income loans have gone the way of the dinosour, self employed borrowers have to be more aware of their tax returns if they plan to buy a house.  Standard underwriting guidelines are that you take the last 2 years filed tax returns, use the Adjusted Gross Income (AGI) on the bottom right of the 1040 form, divide that by 24, and that is the number that will be used to qualify you for a loan.  Be aware that if you “made” $100k, but you wrote off $70k in expenses, your income is $30,000.  There are a few items that can be added back into your income such as depreciation since it is not an actual cash expense.

I am neither an accountant nor a lawyer, so I will not presume to give legal or accounting advice.  However, I am an expert in mortgage financing, and rest assured, an underwriter is not going to use your gross income for qualifying.

Example:

Say you own a landscape company with gross receipts of $120,000.  But, your cost of goods (gas, equipment, mileage, supplies) was $72,000.  This would mean that your adjusted gross income would be $48,000.  On a monthly basis, your income would average out to be $4000 per month.  You are generally allowed to have a debt ratio of 40% to 45% (depending on the loan program) for your total expenses.  In this example, 45% would be $1800.

If you have a car payment of $350/ month and other debt payments of $400/month (credit cards, student loans, child support, alimony, etc.), it would leave you with $1050 to use for mortgage financing.  Take away property taxes and home owners insurance in that payment, you are probably left with about $900 for the actual mortgage payment.  At 6% on a 30 year term, this means that you would qualify for a loan amount of $150,000.

This is a good example of exactly the calculations I use when pre-qualifying someone for a home loan.

As we near the end of the year, and tax season is coming up, this will be an important conversation to have with your accountant if you have any plans to buy a home in the next few years.  your decision to save a few thousand dollars on your tax bill could very well keep you from buying a home.

If you would like to discuss your personal situation, call me at 888-257-8383 or go to Pensacola Mortgage Solutions.

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LIBOR Index In For A Bumpy Ride

If you currently have an adjustable rate mortgage tied to the LIBOR, you may be in for a shock at the next adjustment.

The LIBOR (or London InterBank Offering Rate) is the rate at which banks loan each other money.  The reason this type of loan became so popular a few years ago was that the index was typically lower than other prevailing indecies used for calculating rates such as Prime or Treasuries.  Unfortunately, because of so much uncertainty in the financial markets regarding the ability of one bank to come through on their paybale obligations, banks are pushing this LIBOR much higher to justify the risk associated with the uncertainty.

Because the LIBOR is on the rise, the next time you have an adjustment coming due (many LIBOR loans were done on a 6 month adjustment), you may be in for a real sticker shock.  Combine that with the strength in long term fixed rates, and you may be looking at the perfect scenario to refinance your loan into a long term fixed rate and stop worrying about the news on a daily basis.

There are a few snags in this plan to be aware of.  First, the value of your home is likely not what it was at the time of your last refinance, so unless your loan was done at a reasonably low loan to value ratio, you may not qualify for a refinance.  Get an estimate of the value of your home for free at www.Zillow.com.  When using Zillow, be aware that the acuracy of the information is somewhere around + or – 10% (based on my own experience).  If you are unsure, I may be able to help you sort through it.  Also, Zillow is notoriously innaccurate on waterfront homes, or homes where a significant portion of the value is based on the location.  All of those disclosures out of the way, Zillow can be useful and fun to use.

The second snag in the plan is the verification of income.  During the same time that LIBOR loans were so popular, stated income loans were “all the rage”.  As long as you had good credit and the right asset profile, you could state your income on the application without the need to verify it in writing.  In the industry these are referred to as “liar loans” because historically, the number given as an income figure more acurately would be filed in the fiction section of the book store.  The days of stated income loans are officially dead.  While there are still a few loan programs out there that offer the option to not verify income in exchange for an increase in your rate, what is not widely advertised (and many inexperienced loan officers don’t even know) is that when your file goes to underwriting, they will pull an IRS form 4506 tax transcript.  This means that the underwriter is going to see the income that you file taxes on whether you provide them or not.

Even hard money lenders, notorious for turning a blind eye on income in exchange for asset based lending, are now turning heavily towards verifying “the ability to repay”.  Contact me to find out if a refinance on your LIBOR adjustable rate loan is the right thing for you and your family.

www.SteveRussellOnline.com