Which factors into DTI? What I make or what my LLC makes?

Question

Quick questions about DTI. My LLC, which is a separate business from anything real estate related, consistently makes about $3,500 a week in profit, but as the sole member and owner of my LLC I am on the payroll at $1,200 a week.  The rest just goes into the business bank account. Will a conventional lender use the 3k or the 1.2k to factor my DTI?  If it is the 1.2k any suggestions on how to get them to use the 3k instead?

Chris Mason · Answer

This is self employment income. I wouldn't even bother asking you for paystubs, because we aren't going to consider what you claim you make ($1.2/month), nor are we going to consider your stated YTD earnings (unless it indicates declining income).

Ballpark, so as not to bore you with too much minutiae: We're going to look at what you told the IRS you made when you filed your taxes, and do a 2 year average (1 yr if most recent year shows declining income). If you told the IRS that you netted $3500*52/12 = $15k per month over the course of the last two tax years, we would start with that number, do some wonky math, and come up with our own number for what you make.

If your DTI is tight, you kind of want to drill down on that PRIOR to it being submitted to underwriting. Self employed people, unfortunately, often get "surprises" while in the middle of buying a home (someone here want to comment on their "surprise!" experience?)

TLDR: Lesser of wonky math being applied to 1) YTD earnings [YTD / # of YTD months] 2) two year tax return average [/24], or 3) one year tax return average [/12]. #1 is almost never the case because all self employed people think they make a crap ton more than what their tax returns say, so it's either a one or two year tax return average, no exceptions.

David Hines · Answer

If it's in your name, they'll use the 1.2k.  However, as the sole member the LLC profits should show on your tax return.  Make sure the lender is reviewing your tax return and they may be able to use the full business profit toward your DTI.

Nicholas Lohr · Answer

I'm pretty sure that most loans these days are "recourse loans" so I think it has to be in my name to start. I know LLC profits flow through to a personal tax return which is why I'm confused if they'll use the LLC profits or not if the loan is in my name.

David Hines · Answer

Are you getting the loan in your name or business name?

Which factors into DTI? What I make or what my LLC makes?

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