Getting Self-Employed Buyers Ready for 2024Daniel Dobbs2023-12-30T08:44:35-08:00
Working with self-employed buyers can be a challenge, or should I say “qualifying them for a mortgage is the biggest challenge” for your MLO.
Agents need to be very careful to only work with S.E. buyers, who have done their entire loan application, in advance of the agent showing them homes-because there are a lot of variables.
DU” Loan Approvals! Never Lose a Buyer Again
How many times have you heard “I make a lot of money” BUT “I don’t show much on my taxes”. Often you don’t really hear them say that until after you’ve shown them countless properties.
Get the Lowest Interest Rate, Fees, and Fastest Service
YouTube – Straight Talk Lending – Daniel Dobbs
The issues usually come down to several scenarios:
1) If Self -Employed Buyers (S.E. Buyers) declare their 2021 income, pay the taxes (qualifying them for a loan) but then they have NO DOWN PAYMENT because it WENT FOR PAYING THE TAXES.
Solution: Buyers can file their taxes in mid-January of 2022 (for the tax year 2019), get the home, and then work out a (re-) payment program with the IRS after April 15th (at an interest rate of approx. 4%).
The buyers get a home, their payment program for the IRS is affordable & most importantly they will have a whole year of mortgage write-offs to “off-set” their income in 2019; allowing them to break the cycle of “Robbing Peter to Pay Paul”.
The key is finding a home in November/December AND THEN CLOSING in escrow EARLY IN JANUARY/ FEBRUARY, or at least March that close of escrow can happen before April 14st.
If the buyers don’t file their taxes past February, they risk a delay of the close of escrow because we have to wait for IRS Form 4506 to be verified by the IRS.
Once the IRS has uploaded it into their database – the “4506T” is accessible with 72 hours- BUT- it can take the IRS WEEKS to upload the buyer’s tax returns once February arrives and every taxpayer in the country has filed for and is clamoring for their refund!
Note: The IRS has advised (again) that they are understaffed so getting the “4506” could take up to 60 days if your client files their 2021 tax return after Feb 15th, 2022.
SO TIMING IS CRUCIAL! If COE doesn’t happen by April 15th, then we have a HUGE PROBLEM (probably deal breaker) because now taxes are due and we have to work out a “re-payment program” with a “6-month payment history” or pay the taxes in full (“back to square 1”).
Also, of Note: No institutional lender and few brokers allow for the taxes to be deferred, most require the taxes to be paid at tax filing (in order to qualify for the loan).
My “go-to” lender doesn’t have this requirement. The buyers can simply work out a payment program with the IRS after close of escrow.
Case solved!
2) Declining Income in 2021—Once again timing is crucial!
Lenders can use only the 2017 tax returns to qualify for an early 2019 tax return but the buyer will have to close escrow before April 1st ..SO FINDING A HOME AND GETTING AN OFFER ACCEPTED BY March 1st is required!
3) Filing an amended tax return.
Buyers who file their 2021 tax returns in (i.e.) April of 2021 and then try to refile an amended tax return (showing more income) later in 2021, will certainly get their loan application denied.
I can give you a 300-word explanation for why they will get denied- but it’s easier just to tell you “they will be denied”.
Anytime taxpayers file amended returns it increases their chance for an IRS audit. Period!
4) Overreporting Income to qualify. BAD CHOICE..VERY BAD CHOICE!
When the FBI or the IRS shows up at the buyer’s business with “bracelets”, the bracelets won’t be from Nordstroms!
5) Under Reporting Expenses: This is a gray area.
S.E. taxpayers always have wiggle room in what they claim (or don’t claim) for tax deductions. It just depends on how aggressive they are with their tax filing.
But they also have a legal responsibility to claim reasonably accurate figures, tax returns can be amended but tread lightly.
6) December Receipts vs December Deductions:
Business owners have the flexibility to deposit December receivables or to roll them over to the next tax year!
Likewise, business owners can pay forward tax-deductible expenses in December or roll them over.
To determine what is best (from qualifying for a loan) consult your MLO AND your tax person for specifics!
7) Hard $$ Loans: The best way to illustrate why hard money loans are not a solution is to simply click on this link: Why Hard Money Loans Rarely Close
In Conclusion
Working with self-employed buyers is both a niche and a challenge; but agents, if you can build a business model which masters the art of working with the “entrepreneur class” the monetary rewards and referrals will be ongoing.
But you will need a loan officer that understands underwriting, taxes, and the headspace of S.E buyers, and how they manage their capital in order to close escrow!
Copywrite © August, 2018 Daniel Dobbs MHM Mortgage /// All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed “Attention: Daniel Dobbs, Author- VP-Broker Mutual Home Mortgage 265 S. Randolph #120 Brea, Ca. 92821 Cell: 949 250-3981 Dandobbs6@gmail.com NMLS #307631 BRE #00986886
