DTI and self employment - Adjusted or Gross?

Question

Harjeet Bhatti · Answer

Ask your lender if they can run LP on your file. If you are in same line of business that should be ok with one year tax return.

Chris Mason · Answer

Hi Ryan,

In cases of declining income, only the most recent low income year is used. Two year average is only used in cases of increasing income, or rock-solid-steady income.

Get your rough draft tax returns over to your lender ASAP, before you file them, and ask your lender how to file them in such a way that you will not get stuck in "4506-T Hell" waiting the 3 weeks to 6 months it takes for the IRS to process your tax returns.

No one ever accurately describes their future/hypothetical tax returns, so your lender need non-hypothetical non-future tax returns in front of him in order to answer that part of your question.

Nicholas W. · Answer

Linked below is the form that most lenders reference when qualifying a self employed person for conventional financing. Basically they will average the past two years and divide it by 12 then multiply it by their DTI limit. If you show little to no income you will run into issues.

To put it simply you ignore your AGI on your 1040 and you reference your schedule C. Take your net profit (or loss) and then add back in any depreciation and amortization as well as a few other things but these are typically the most substantial deductions. If the reason you're showing lower adjusted gross income this past year is because you have a significant depreciation or amortization you shouldn't have a problem.

Fannie Mae Form 1084

Andy Davey · Answer

If you are looking at a traditional lender then the concern is real however your lender should be able to see what is happening and why and make some good decisions. If the lender isn't work with you... move on... The property you are looking to finance should be part of the overall equation as well (if you have a deal at 50% LTV then it is hard to decline essentially anyone).

We don't work in Houston but if you need someone down there there are a couple of great lenders that you can go to. PM me if you want that info.

We don't work in Houston but if you need someone down there there are a couple of great lenders that you can go to.  PM me if you want that info.

Chris Mason · Answer

Declining income is not enough to get the whole loan denied, but yes the most conservative average is what will be used (which can impact DTI, which can certainly be a deal killer in some cases). A satisfactory explanation for why the business had a weak year will be needed.

Ryan M. · Answer

Nicholas, thanks for the FannieMae form, that actually helps a lot. We have huge deductions from travel which seems not to be included in the calculations which raises my income by around 15%.

Am I understanding correctly that in the case of declining income that basically the income from my most recent return is what will be counted? Or is a decline itself a reason to get denied? Would it help to have three or four years returns?

DTI and self employment - Adjusted or Gross?

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