questions on conventional financing qualification

[Tracey Hamilton]

I have a few questions about qualifying as an individual for an owner occupied sfh with conventional financing. these will be specific to a newly divorced woman applying for the first time on her own. 1) is w2 income received from an llc s-corp business owned by the applicant treated any differently then w2 income received from an unrelated employer? would this even need to be disclosed? 2) for purposes of dti ratios, is only the current rate of pay considered, or is an average of the last two years w2 income used? 3) can a two-year guaranteed-compensation employment contract be presented in lieu of the typical requirement of two years employment history? if so, would it be disallowed if the applicant were the signing officer for the corporation? thank you!

[Chris Mason]

Hi @Tracey Hamilton,

1) Yes. It's self employment income, so it'll be based on two full years of business and personal tax returns.

2) Two year average of everything will be used. No, giving yourself a bigger paycheck/w2 will not matter. No, giving yourself a smaller paycheck/w2 will not matter either. Stability and continuity is the key.

3) Not for self employed persons, no. 

[Tracey Hamilton]

Chris, do the lenders actually ask if you are an owner of the business? or do they just look at the w2? not trying to pull anything inappropriate here, but I am weighing whether it would be worth the increased payroll costs to recharacterize more of the business income as w2 wages vs pass through income, as qualification standards seem much simpler for w2 wage earners vs schedule c business owners.

[Tracey Hamilton]

Nevermind, I thought it all through more last night and answered my own question.  Any wages coming from a pass-through entity would show the corresponding remaining profit on the 1040, so it would only increase payroll without simplifying anything.  I do think if the businrss were converted to a c corp, it would simplify the mortgage application, but obviously greatly complicate the business.  Sigh.  Newly divorced sahm's have significant barriers to home ownership, even when there are assets and some income.