If I put 25% down does the bank care about my Income? Advice?

Private Lending & Conventional Mortgage Advice
9yFollow

If I put 25% down does the bank care about my Income? Advice?

Rob Tossberg
Los Angeles, CA · Member since 2017 · 16 posts · 4 votes

Hi!

I'm self-employed and looking for a multi-family for investment purposes.  I'm going back and forth on declaring my income for 2016 - and taking the hit with taxes - or not declaring and keeping the money that would go towards paying taxes.   

From a loan perspective if I have the 25% downpayment does my income on a tax return matter or not?  I'm getting different answers from different mortgage companies and I thought I'd ask on BP.  Thanks in advance, I'm grateful for your advice and input.

0Reply
108 views

Most Popular Reply

Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y

Yes, your income will always matter no matter what percentage you put down.

I will just point out that even though you are self employed, declaring your expenses on your tax return is not optional.  If you deliberately claim fewer expenses (or inflate your income) in order to qualify for a mortgage, this is technically mortgage fraud and the penalties for that are very severe, up to and including incarceration.

You have a little leeway in personal expenses you choose to declare in your business such as mileage on your personal vehicle and home office, but anything else that is required to run your business (everything from office supplies to rent to inventory to subcontract labor) is fully reportable.

While the IRS will not care if you reduce your expenses and pay more taxes, the mortgage company most certainly will.  

Podcast Guest on Show #244
2Reply
See this reply in the discussion

23 Replies

Jump to latestLatest
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Yes, your income will always matter no matter what percentage you put down.

    I will just point out that even though you are self employed, declaring your expenses on your tax return is not optional.  If you deliberately claim fewer expenses (or inflate your income) in order to qualify for a mortgage, this is technically mortgage fraud and the penalties for that are very severe, up to and including incarceration.

    You have a little leeway in personal expenses you choose to declare in your business such as mileage on your personal vehicle and home office, but anything else that is required to run your business (everything from office supplies to rent to inventory to subcontract labor) is fully reportable.

    While the IRS will not care if you reduce your expenses and pay more taxes, the mortgage company most certainly will.  

    Podcast Guest on Show #244
    2Reply
  • Jason Little
    Lender · Point Lookout, NY · Member since 2017 · 88 posts · 22 votes
    9y

    In order to get any type of conventional mortgage, you will need to disclose your income. Self employed borrowers are even more scrutinized in this regard, as they present more of a risk.

    There are loans that could qualify you off just assets no income, but you would need to have around 175% of the purchase price in liquid assets, and you would get hit with significantly higher rates and fees. 

    Honesty is your best policy with lenders. Find a local LO you can trust, explain your situation fully, and see what options they can offer from there. 

    0Reply
  • Terry Lao
    Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes
    9y

    @Rob Tossberg

    Looks like you want your cake and eat it too. Put less expense, pay more on taxes, but help on loan qualification. Put more expense, pay less on tax, but hurt on loan qualification.

    You might have out if you have 2 years landlord experience on tax returns. Then you can use 75% of lease agreements against total PITI, HOA, etc. If you buy in LA/OC, you will have big negative, but might still qualify without messing with tax returns. If buy out of state, then will have small positive cashflow or at worst break even.

    Terry Lao

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    The Multi-Family(5+) are all Commercial Loans(CL) and your personal credit is secondary to the property DSCR. Learn how to calc this and expect that you will need a 1.2->1.3 value to qualify.

    The CL demands that the property support itself from the GSI it generates, so the rent-roll is a key factor.

    Look for a LOCAL business bank or Credit Union and avoid the Big bank nationals.

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Linda Weygant:

    Yes, your income will always matter no matter what percentage you put down.

    I will just point out that even though you are self employed, declaring your expenses on your tax return is not optional.  If you deliberately claim fewer expenses (or inflate your income) in order to qualify for a mortgage, this is technically mortgage fraud and the penalties for that are very severe, up to and including incarceration.

    You have a little leeway in personal expenses you choose to declare in your business such as mileage on your personal vehicle and home office, but anything else that is required to run your business (everything from office supplies to rent to inventory to subcontract labor) is fully reportable.

    While the IRS will not care if you reduce your expenses and pay more taxes, the mortgage company most certainly will.  

     +1

    @OP - it is also worth having a conversation with your lender about where to put some of these optional write-offs. For example if you put vehicle depreciation associated with business mileage on line 44A it can be 'added back.' So you would take that nugget (or whatever is applicable to you specifically) from your lender, and ask your tax professional if that is lawful (lenders aren't tax professionals), and boom you found a way to decrease your tax burden without dinging your mortgage-qualifying income by as much as you decreased your tax burden.

    2Reply
  • Rob Tossberg
    OP
    Los Angeles, CA · Member since 2017 · 16 posts · 4 votes
    9y

    First, thanks to all of you for your input/advice!  As you said @Linda Weygant there is some leeway on what I can write off and it makes a difference in my income so I appreciate what you say.

    @Jason Little I wish I had the 175% of purchase price in liquid assets - particularly here in Los Angeles!  

    @Terry Lao Yes!  Most definitely want my cake and eat it too.  I'm sorry I don't understand what you mean by the 2 years landlord experience - do you mean if I already owned a duplex then that would be a track record for future lending?  And yes- that's my problem, living in LA and seriously looking to buy something in Compton because it's doable - (but perhaps stupid?)

    0Reply
  • Terry Lao
    Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes
    9y

    @Rob Tossberg

    This is for 1-4 units (duplex, triplex, fourplex). If you have filed schedule E (rents and royalties) for 2 years, then that is your track record for being a landlord. That allows you to purchase 1-4 multi-units provided that are rented and have lease agreements. The lender (fannie mae) will allow 75% of rents against the total PITI/HOA. If you are planning to buy in LA/OC, it will definitely help qualify. To sort of get around this, buy with a partner, then for the first two years, then both can help each other qualify current and future properties. Also, need fico greater than 740, LTV 75%.

    A fourplex will cost you at least 650-700k in LA/OC. You can get fourplex outside of state, like Las Vegas for $220k, and double digit ROI.

    Terry Lao

    0Reply
  • Terry Lao
    Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes
    9y

    @Rob Tossberg

    I just thought of a great suggestion. Why don't you buy out of state to get your 2 years landlord experience on your federal tax returns? Then after 2 years, come back into the LA/OC market.

    Also, Nevada does not have state tax like California, maybe save another 10%.

    Terry Lao

    0Reply
  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    9y

    @Rob Tossberg , I am buying a condo in Florida and have just been through this process. Yes, it all matters on non owner occupied when you're trying to get a 30-year fixed. What's strange is a qualified last week for a non owner occupied condo loan on a non-warrantable condo but the loan program changed this week! I was going to have to put 25% down but all that other stuff still mattered. I had to give Hud-1s on all my rentals that I had purchased, they wanted HOA statements, loans statements, insurance verification, and ongoing income. And, they wanted me to continue sending all that in. It was painful, a ton of work, and I still didn't get the loan. I can only imagine being self-employed will be even more painful.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Aaron Norris  we are buying a second home in Summerlin right now and it has not been too bad.. But I sold all my rentals but 2 and I am not sure if they asked for those or not as they are free and clear.

    Anyway... WHats your Dads take on where we are at in the current Cycle.. ???

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Rob Tossberg
    OP
    Los Angeles, CA · Member since 2017 · 16 posts · 4 votes
    9y

    @Jay Hinrichs you bring up a great point about where we're at in the cycle?  I wonder if I should just keep saving and wait.  BTW love lake oswego - graduated from L&C College oh so looong ago.

    @Aaron Norris if i wasn't laughing I'd be crying - self-employed is a beautiful curse.  You're not concerned about @Jay Hinrichs / where are we in the cycle? since you're buying in FL?

    @Terry Lao are you doing this in Nevada - could you point me somewhere?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Rob Tossberg  Aarons Dad Bruce is a famous predictor and economist in regards to RE cycles that's why I asked.

    for me I am buying a home to relocate to and take up residency in NV to escape the winter in OR and take the tax advantages of being a NV resident.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    9y
    Originally posted by @Jay Hinrichs:

    @Aaron Norris  we are buying a second home in Summerlin right now and it has not been too bad.. But I sold all my rentals but 2 and I am not sure if they asked for those or not as they are free and clear.

    Anyway... WHats your Dads take on where we are at in the current Cycle.. ???

     2009 was the the last time I applied for a mortgage and I "might" have not disclosed some rentals that I owned free and clear as I qualified easily without them and I was putting 25% down.  Then I found out about the MERS report and I had some explainin' to do !  I had no idea that they could find out that stuff

    0Reply
  • Terry Lao
    Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes
    9y

    @Rob Tossberg

    Location is north east Las Vegas, zip code 89121, and near strip off Maryland, it's where I currently have my 4 plexes. Bought 1 year ago and  2 years ago. Huge price jump since January . I think attributed to low inventory, Las Vegas raiders, and spring selling season.

    Terry Lao

    0Reply
  • Rob Tossberg
    OP
    Los Angeles, CA · Member since 2017 · 16 posts · 4 votes
    9y

    @Terry Lao  Thanks, that's really helpful - did a realtor help you, would you recommend?

    0Reply
  • Terry Lao
    Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes
    9y

    @Rob Tossberg

    No, a realtor did not help me to find the property. I look at Redfin and Zillow, both are tied to the MLS. I look at what sold, pending, and new listed. When I find a property that is still attractive after running the numbers, and get target ROI of 15-20% on paper, I look at who the listing agent is. Their office or cell phone can easily be attained. I inform the agent that I am not being represented by a realtor, and if you want, can represent me. By doing this can gain valuable information like if other offers are on table, and sometimes even what competitors are offering.

    Las Vegas is a competitive market and deals are getting harder to find. If you want, I can tell you one that would get double digit returns, 10-12% ROI. It is in same complex that I currently own.

    Note, what on paper is 15-20%, you would want that cushion in case of unexpected expenses. 

    Terry Lao

    0Reply
  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    @Rob Tossberg If you were lending someone money would you care if they had income to pay you back?  Even if the money is secured by an asset if the asset loses the ability to maintain itself how will the bank get paid?  Aside from foreclosing and taking a loss?

    0Reply
  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    9y

    @Jay Hinrichs , that's a loaded question! That's why we had that February event. It ended up being 10 hours of info. Let's put it this way, we're expanding our business in California. We're now lending in Norcal.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Aaron Norris  I remember listening to the Oracle of Riverside at the SJREA event.. at that time he had no interest in N. CA.... what stuck with me was his opinions on investing in Texas .

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    9y

    @Rob Tossberg , I am not selling all my rentals but I am repositioning to other assets in different areas but keeping the properties I love. I've got some amazing financing on some rentals and I bought them at a price that I don't know if they will ever sink to again. LA is hard because cash flow just isn't happening unless you're headed up north. It's definitely not 2011 anymore. And, we are telling our network to not expect that market to correct mistakes. So, don't buy a flip thinking it will increase 10% a year! 

    0Reply
  • Kevin Geary
    Real Estate Agent · Las Vegas, NV · Member since 2016 · 21 posts · 7 votes
    9y
    Originally posted by @Terry Lao:

    @Rob Tossberg

    "Huge price jump since January . I think attributed to low inventory, Las Vegas raiders, and spring selling season."

    Terry Lao

    You aren't kidding...The winter was easy, ever since spring break started the sub 300k market went crazy. No inventory, multiple offers, sellers not even thinking of contributing to closing costs, every other appraisal coming in under. It isn't easy for my buyers right now!

    0Reply
  • Terry Lao
    Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes
    9y

    @Kevin Geary

    my target is multi-units, but I guess price is up for all categories (condo, townhouse, SFR, multi-units).

    Are you talking about SFR, homes, for under 300K? that is still high, unless for Summerlin area. Numbers for Apr'17 just came out. Median price home, SFR, is $249k, on upward trend since market bottomed out, at $135k, Feb'12. Per stats from GLVAR.

    I do notice multi units especially 4 plexes, have been selling fast, like matter of a week or two, in the range of 200-240k.

    Terry Lao

    0Reply
  • Kevin Geary
    Real Estate Agent · Las Vegas, NV · Member since 2016 · 21 posts · 7 votes
    9y

    @Terry Lao I operate mostly in Northwest & North Summerlin. I'm talking SFR. Since spring hit it seems that the amount of buyers around that median price and below jumped while inventories remained about the same. Standard supply and demand I guess. In the winter there might have been 2 or 3 offers on a property in that price range, now you're seeing 10+ offers, often. Sellers market right now, for sure.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free