Most people understand that getting mortgage financing is not the most fun thing in the world to do. There’s an examination that takes place which is these requests for paperwork on the process and these requests for paperwork in the process can sometimes, for someone that doesn’t have familiarity with the mortgage process make it seem like the process is difficult or that the bank does not want to Grant your mortgage when that may not necessarily be true.
Hear the 3 things you should be aware of:
1. If you’re self-employed and you show the income, you’re going to have most likely nothing to worry about. The key however here is showing the income via tax returns and a year-to-date profit and loss. The year-to-date profit and loss statement is to show that the current income is consistent with the most recent year’s tax filing doesn’t sound hard, right? Well, due to covid-19 if you changed your business filings; for example, if you went from being a scheduled C borrower to being incorporated; that may also pose an additional risk. Doesn’t necessarily mean you won’t get the loan, but it does mean that your process might be more cumbersome or that your borrowing power might not be quite as high as what you are expecting.
2. Your down payment and business money are interwoven through the same bank accounts. This can be problematic because it looks like business funds are being used for the down payment. At least it has the looking like that on paper. This is a big red flag that will cause the mortgage underwriter to condition for a statement from the cap specifically stating that pulling money from the business will not hurt the viability of the business. Most accountants are not willing to stick their neck out there for their clients like that, this is something you need to know. Keep your business assets in the form of business funds and keep your funds in the form of personal funds. Make sure you have enough money from your funds to purchase the house, if you must, move money into business funds for the down payment and/or closing costs. For example, if you were to move the money from your business account to your account, and 60 days went by, the mortgage underwriter is not going to request business money and/or business statements since all the money being used is from personal accounts. That’s a way to avoid the unnecessary CPA letter that invariably will pop up in the process otherwise.
3. Your debt-to-income ratio is too high. Let’s say you have both factors above: yourself employed and you’ve been moving money around. On top of that, you have a debt-to-income ratio. Even if the debts are paid for by your business and you can’t document those business debts on your tax return it doesn’t matter if it’s a business debt or not even if it’s coming from a business bank account because it’s not specifically identified on the tax return. Sounds crazy right? Well not so much, especially if you’re looking at a government loan the above situation would be challenging on a conventional loan but would be much more possible. It’s going to come with more red tape and far more examination questions from the bank as they are much more concerned with a self-employed borrower who has a possible debt-to income ratio who’s been moving money around in their bank accounts. This is just something that you need to know and be aware of when working with a competent mortgage professional who understands the unique specific dynamics of FHA loans, self-employment borrowers, and an inherent ability to be creative to help you lower your debt-income ratio.
So if you’re looking at an FHA loan and the above scenario in any way at all pertains to you, make darn certain you pick a solid loan officer who is up for the challenge. It does not mean that your loan will not work but it does mean that you’re going to have a much bumpier loan process. The government specifically is not very interested in signing off on loans to borrowers who generally statistically have shown a higher payment default rate in the past and therefore it’s non-employed borrowers typically have a harder time getting loans.
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