Refinance with Self-Employed Income

9 Replies

Trying to refinance cash-out on a duplex.  Excellent credit. Went through most of the process, and was shut down because we have self-employed income only.  "I thought you still had a job (W-2)"...  

What's the best way to refinance?  Are there lenders that'd consider conventional mortgage for self-employed borrowers?

Hi @Amy Greger ,

I don't know your full scenario and situation, but for self employed persons our math is largely based on your tax returns.

Get tight with a lender local to you on when the soonest you can file returns is, and how you can have those returns "counted" without having to wait a zillion years for the IRS to process them, in 2017. 

Hi @Chris Mason ,

We just filed 2015, so the lender had 2014 and 2015. Of course most of the income did not flow back to our 1040, which is the whole point of being self employed and able to write off all kinds of expenses.  So much time was spent with the last lender... very frustrating.

So, you and the lender both screwed up, @Amy Greger . You lied to the IRS (like many newly self employed persons -- I'm not judging you, here, it's simply a fact), and the LO didn't catch it early in the process.

If you tell the IRS that you make $25k a year to save on taxes, that means lenders are going to lend to you based on you making some number close to $25k/yr. 

W2 people, it takes me a fraction of one business day to preapprove them.

Self employed people, it often takes me a week or two because I have to sift through all their lies and misrepresentations to the IRS, and there are three or 4 phone calls and requests for additional documentation that I have to send and get back....

HONEST self employed people, who are a very small minority, it takes a fraction of one business day, just like the W2 people.

@Chris Mason  

Wow... interesting.  Write offs for legitimate business expenses are lies?  My company funds our Defined Benefit Plan, pays for insurance...etc.  How are these lies and dishonest?  

Hi @Amy Greger ,

I don't have your tax returns in front of me, so I could be wrong.

I'm jaded by the bulk of self employed persons that do lie. So you can fault me for that. :)

But, to be clear, if I ask you "hey Amy, what did you make last year?" you will answer with a number that exactly matches line 37 of your 1040s down to the dollar... right? You're not telling the IRS one thing, and walking into a bank or mortgage broker's office and trying to claim a different number?

@Chris Mason

They should have no problem approving us based on line 37 of 1040!  But they said self-employed income is unreliable even though we show consistent year-to-year income.  In 2015 we funded extra in the DB Plan, so the K-1 income dropped as a result.  Apparently they only consider W-2 income "reliable".  

@Amy Greger ,

OK, then I misread you. My apologies! 

We have threads here daily where someone told the IRS they make $50k, and then walks into a bank and tries to say they make $150k, and then they are outraged that no one wants to give them a loan. These folks either committed tax fraud (meaning a tax lien might be placed on the house the day after the mortgage closes), or they are trying to commit mortgage fraud (meaning they can't afford the mortgage), and either way the answer is "no thanks, we'll pass on this deal."

You are apparently not one of those persons. :)

For folks like you that honestly report your income to the IRS, your self employment income will be based typically on a two year tax-return-based average, or in some circumstances just one year. There are a few other nuances, but yeah it'll always be based just on your tax returns.

The GOOD NEWS for you is that we're less than three months away from when you can file your 2016 tax returns, and accurately have a second year of documented income to be taken into consideration. There's always a flurry of self employed people getting mortgages in Q1 of any given calendar year, for this reason. 

Please ensure that "amount you owe" showing on page 2 of your 1040s exactly matches a withdrawal clearing your account, bound for the IRS. Do not have the CPA payment, state income taxes, and so on, be lumped in with that transaction. If "amount you owe" is $12,345, do yourself a favor and have one transaction that is exactly $12,345 clearing your account, bound for the IRS. Pay the dog walker and your CPA in a separate transaction. :)

@Chris Mason  

Yes, I always keep the transactions separate.  Mostly for my sanity - difficult to track expenses otherwise.

Originally posted by @Amy Greger :

@Chris Mason

They should have no problem approving us based on line 37 of 1040!  But they said self-employed income is unreliable even though we show consistent year-to-year income.  In 2015 we funded extra in the DB Plan, so the K-1 income dropped as a result.  Apparently they only consider W-2 income "reliable".  

 The Employer side of 401k matching, DB or Defined benefit plans, or SEP - self employed pension, and other employer contributions are counted as a cost of doing business to retain officers, directors, and talent. so while this may be viewed by you as your own money being contributed else where to invest for your retirement, on our end  it "counts," as an expense to your bottomline. This is probably why you mentioned your Line 37 or Adjusted gross income is lower because of it.

W2 income is not the only income that is reliable.

I will disagree with Chris that most self employed people "lie," persay but there are a lot more benefits available to self employed and for business owners that are legal deductions you're allowed to take. The downside of course whether you took them ethically and legally or if you took these deductions as a "lie," is that it will be deducted from your bottom line. Accounts I work with personally tend to say anything that is "necessary," and "ordinary," in the course of business can be characterized as a deduction. I would however recommend that you do some mortgage planning and figure out how your income and deductions play into your end of year income especially if you want to have a good idea of what can qualify for the next year since lenders will use your 2016 tax return for 2017 and so on.

Lenders are generally looking at cash flow so there are deductions that aren't actual losses like depreciation, amortization, depletion, business mileage and others that you may be able to add back  depending on how you file.

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