How to Get a Mortgage without W2 Income

8 Replies

A critical element of RE investing is access to good financing; rapid lender approvals and good terms provide an investor significant advantage in winning deals and generating strong ROI.

For first-time investors or those with just a small portfolio, attractive mortgage financing is typically a result of a W2 job and good credit.

Well, I’m no longer a W2 employee. Instead, I own a new business and take periodic cash distributions. Having taken the entrepreneurial plunge just about a year ago, I can definitively say that being my own boss is one of my greatest professional achievements. But, said plunge has also brought new obstacles for my real estate investing, like losing my pre approval status for traditional mortgage financing. Traditional lenders are highly risk averse and follow a very specific underwriting protocol (see anecdote to this point at bottom of post), and my new employment status fundamentally changed my borrower profile.

Let’s break this down. Traditional mortgage lenders like:

  • Steady, long term employment from a stable employer
  • Regular pay check
  • Low debt to income ratios
  • Liquidity / cash cushion
  • Track record of paying back loans (i.e. good credit history)

Hence my challenge as a new business owner applying for financing:

  • My company had been incorporated for less than a year (far from “stable”)
  • No regular salary (those familiar “pay stubs”)
  • Lower earning profile while business ramps and we invest earnings into growth

Fortunately, I had done my financial homework.

I knew my access to mortgage financing would change when I started my new co, so I reached out to various lenders and my accountant last year for advice. I asked how I could best position myself for mortgage financing considering my new employment status. Here’s the advice I received:

“Develop a regular income record, and generate documentation that lenders are familiar with.”

So, put myself on traditional payroll, right?

Not if you're a member of an LLC (which I am). With traditional payroll, I'd unnecessarily incur payroll taxes as well as deductions like FICA (social security and medicare), federal and state income taxes. Yes, I in fact made this payroll mistake for a couple months.

Instead, as an LLC member, it's tax-advantaged to take "gross member distributions".

The workaround? I put myself on something that “looks” like payroll.

I now take gross member distributions on the same timetable we pay our full-time employee: twice per month. And, I do it using our payroll provider, Gusto. No taxes or deductions, just a direct pass-through.

  • Regular pay check? Yes.
  • Documentation that a lender understands (e.g. “pay stubs”). Yes.
  • Tax-advantaged distribution for an LLC member? Yes.

I’ve now been on “payroll” for 2+ months, and just last week I reached back out to my lenders to begin mortgage pre-approval conversations. This is timely, because I have a goal of purchasing another multi-family investment property in Omaha before year end.

Based on my lender convos this week, I still have more work to do, but I’m on my way. I’ll report on their feedback and next steps in my next newsletter.

The big lesson here is that there are no insurmountable obstacles in RE investing. Stay informed and know your options. Like all things in life, many roads lead to point B. Find the best fit road for you, and make something awesome happen.

ANECDOTE: My accountant told me a story about one of his clients who owns an LLC and makes $5mm+ per year…and still couldn’t gain access to traditional mortgage financing. His client therefore had to acquire the property in cash, “season it”, and then obtain a mortgage. Crazy.

Originally posted by @Christopher Erwin :

A critical element of RE investing is access to good financing; rapid lender approvals and good terms provide an investor significant advantage in winning deals and generating strong ROI.

For first-time investors or those with just a small portfolio, attractive mortgage financing is typically a result of a W2 job and good credit.

Well, I’m no longer a W2 employee. Instead, I own a new business and take periodic cash distributions. Having taken the entrepreneurial plunge just about a year ago, I can definitively say that being my own boss is one of my greatest professional achievements. But, said plunge has also brought new obstacles for my real estate investing, like losing my pre approval status for traditional mortgage financing. Traditional lenders are highly risk averse and follow a very specific underwriting protocol (see anecdote to this point at bottom of post), and my new employment status fundamentally changed my borrower profile.

Let’s break this down. Traditional mortgage lenders like:

  • Steady, long term employment from a stable employer
  • Regular pay check
  • Low debt to income ratios
  • Liquidity / cash cushion
  • Track record of paying back loans (i.e. good credit history)

Hence my challenge as a new business owner applying for financing:

  • My company had been incorporated for less than a year (far from “stable”)
  • No regular salary (those familiar “pay stubs”)
  • Lower earning profile while business ramps and we invest earnings into growth

Fortunately, I had done my financial homework.

I knew my access to mortgage financing would change when I started my new co, so I reached out to various lenders and my accountant last year for advice. I asked how I could best position myself for mortgage financing considering my new employment status. Here’s the advice I received:

“Develop a regular income record, and generate documentation that lenders are familiar with.”

So, put myself on traditional payroll, right?

Not if you're a member of an LLC (which I am). With traditional payroll, I'd unnecessarily incur payroll taxes as well as deductions like FICA (social security and medicare), federal and state income taxes. Yes, I in fact made this payroll mistake for a couple months.

Instead, as an LLC member, it's tax-advantaged to take "gross member distributions".

The workaround? I put myself on something that “looks” like payroll.

I now take gross member distributions on the same timetable we pay our full-time employee: twice per month. And, I do it using our payroll provider, Gusto. No taxes or deductions, just a direct pass-through.

  • Regular pay check? Yes.
  • Documentation that a lender understands (e.g. “pay stubs”). Yes.
  • Tax-advantaged distribution for an LLC member? Yes.

I’ve now been on “payroll” for 2+ months, and just last week I reached back out to my lenders to begin mortgage pre-approval conversations. This is timely, because I have a goal of purchasing another multi-family investment property in Omaha before year end.

Based on my lender convos this week, I still have more work to do, but I’m on my way. I’ll report on their feedback and next steps in my next newsletter.

The big lesson here is that there are no insurmountable obstacles in RE investing. Stay informed and know your options. Like all things in life, many roads lead to point B. Find the best fit road for you, and make something awesome happen.

ANECDOTE: My accountant told me a story about one of his clients who owns an LLC and makes $5mm+ per year…and still couldn’t gain access to traditional mortgage financing. His client therefore had to acquire the property in cash, “season it”, and then obtain a mortgage. Crazy.

 Hello Sir,

Just because you're self-employed doesn't make it any harder to obtain financing. The key for self-employed borrowers has always been how much are you writing off on your 1040's.

In the example you gave I can guarantee that his client wrote off almost all his/her money. So, on paper they made nothing. I get it, we must play the write of game but in RE financing you can't have it both ways. If you write off a lot or all your earnings you most likely won't qualify for a Fannie, Freddie or FHA loan. If you pay Uncle Sam, then income wise you're good to go as a self-employed borrower.

The market has opened a lot in the last 2 years and bank statement programs, NINA (No Income No Asset loans) and other alternative loans have reemerged.

It's imperative that you get with a loan officer or Broker that knows how to qualify you and other self-employed borrowers.


I hope this helps Sir and have a wonderful day.

Originally posted by @Christopher Erwin :

A critical element of RE investing is access to good financing; rapid lender approvals and good terms provide an investor significant advantage in winning deals and generating strong ROI.

For first-time investors or those with just a small portfolio, attractive mortgage financing is typically a result of a W2 job and good credit.

Well, I’m no longer a W2 employee. Instead, I own a new business and take periodic cash distributions. Having taken the entrepreneurial plunge just about a year ago, I can definitively say that being my own boss is one of my greatest professional achievements. But, said plunge has also brought new obstacles for my real estate investing, like losing my pre approval status for traditional mortgage financing. Traditional lenders are highly risk averse and follow a very specific underwriting protocol (see anecdote to this point at bottom of post), and my new employment status fundamentally changed my borrower profile.

Let’s break this down. Traditional mortgage lenders like:

  • Steady, long term employment from a stable employer
  • Regular pay check
  • Low debt to income ratios
  • Liquidity / cash cushion
  • Track record of paying back loans (i.e. good credit history)

Hence my challenge as a new business owner applying for financing:

  • My company had been incorporated for less than a year (far from “stable”)
  • No regular salary (those familiar “pay stubs”)
  • Lower earning profile while business ramps and we invest earnings into growth

Fortunately, I had done my financial homework.

I knew my access to mortgage financing would change when I started my new co, so I reached out to various lenders and my accountant last year for advice. I asked how I could best position myself for mortgage financing considering my new employment status. Here’s the advice I received:

“Develop a regular income record, and generate documentation that lenders are familiar with.”

So, put myself on traditional payroll, right?

Not if you're a member of an LLC (which I am). With traditional payroll, I'd unnecessarily incur payroll taxes as well as deductions like FICA (social security and medicare), federal and state income taxes. Yes, I in fact made this payroll mistake for a couple months.

Instead, as an LLC member, it's tax-advantaged to take "gross member distributions".

The workaround? I put myself on something that “looks” like payroll.

I now take gross member distributions on the same timetable we pay our full-time employee: twice per month. And, I do it using our payroll provider, Gusto. No taxes or deductions, just a direct pass-through.

  • Regular pay check? Yes.
  • Documentation that a lender understands (e.g. “pay stubs”). Yes.
  • Tax-advantaged distribution for an LLC member? Yes.

I’ve now been on “payroll” for 2+ months, and just last week I reached back out to my lenders to begin mortgage pre-approval conversations. This is timely, because I have a goal of purchasing another multi-family investment property in Omaha before year end.

Based on my lender convos this week, I still have more work to do, but I’m on my way. I’ll report on their feedback and next steps in my next newsletter.

The big lesson here is that there are no insurmountable obstacles in RE investing. Stay informed and know your options. Like all things in life, many roads lead to point B. Find the best fit road for you, and make something awesome happen.

ANECDOTE: My accountant told me a story about one of his clients who owns an LLC and makes $5mm+ per year…and still couldn’t gain access to traditional mortgage financing. His client therefore had to acquire the property in cash, “season it”, and then obtain a mortgage. Crazy.

Hate to break it to you, but forming an LLC isn't magical. If you own >25% of the business entity, you're considered self employed no matter what your paystubs say. Full business tax returns will be required covering the most recent two tax years. An LO who isn't doing their full due diligence or who is new might miss that and write you a preapproval letter, but an underwriter wont. That's the difference between "pre"approval and approval.

The most common thing that comes up when people try to get around the Fannie requirements by establishing new business entities, or drastically changing their self-paid comp plan/structure, is that they effectively reset the 2 year clock. On a one-off case-by-case basis underwriters will sometimes work with the change provided the time since restructure plus time before the restructure adds up to 2 years (your anecdote quite possibly being an example), but the income they calculate is generally less than if there wasn't an attempt to circumvent the guidelines. 

If you want to buy before the 2 year mark, you're probably looking at one of the bank-statements-instead-of-tax-returns-for-income programs like Shaun is talking about. Rate will fall below hard money but above Fannie. 

Also note that tax professionals and mortgage professionals disagree with each other a LOT. Best not to take tax advice from a mortgage person, or mortgage advice from a tax person. The two professions understand each other just enough to give bad advice. 

@Christopher Erwin

There are no short cuts or "work arounds" that will magically make you less self employed.  The key for you is to get the right kind of mortgage for your situation and work with a lender/broker that has a variety of products at their disposal.  Just because you have an app that will provide you paystubs etc..., doesn't mean an underwriter won't ask for your full 1040's and blow up your scheme.

Mortgage fraud is a big deal. Not saying your trying to commit fraud but perception is reality for many. Just saying there are products out there that you can use to achieve your goals without stretching the truth or lying by omission.

Pro tip of the day: There are numerous no income verification loans for investment properties on the market today (business purpose loans) that require you to close in an entity and you can use a new LLC. No, it's not Fannie Mae money, but hey close all the time.

Stephanie

@Shaun Weekes @Chris Mason

Thanks for the thoughtful feedback and review of various options I should consider. This is why I love posting in BP.

Yes, I have been in close contact with my loan officers in Omaha, and was advised that 2 years of business tax returns is the high preference, though by January I'll be approaching 18 months and will be wrapping up my first full calendar year, which they said could get me over the hump with an underwriter. Of course, no guarantees per the loan officer, as 2 yrs is the standard.

Chris, that's a good note re the pre and post restructure, and how underwriters might consider a blend scenario. An important note to clarify for the article readers is that I materially changed my profession, so it was not a restructure of an existing business / income stream, but the development of an entirely new one. I left my media executive job in LA and co-founded a media advisory firm, and it's been a BIG awakening at the new financing challenges it's created, even with meaningful income for our first 18 months in operation. I write a newsletter for a lot of media execs in LA, and a lot of my readers had asked for guidance on how entrepreneurship might impact their RE investing ambitions. Of course, your restructure note is still highly relevant, so thank you for sharing.

Thanks for the bank statements tip too, I'll look into that. My recent financing "workaround" has been getting my twin brother, who has a very strong financial profile as an officer in the army, to be my co-guarantor on my mortgage. We'll receive a great interest rate that's better than hard money and the statement model you mention, though I'll get a family co-investor, which has its own advantages / disadvantages that I need to be wary of.

I love your last line about tax and mortgage advice...I will definitely quote that in my next newsletter to my investor peers!  

@Stephanie P. Thanks for the thread contribution. And you raise a good point. That last thing I'd want to do is have my newsletter readers (which includes my loan officers) or the BP community think I'm trying to do a "scheme" or not accurately represent my actual earning profile. My intended message was instead to provide documentation that lenders are familiar with...as @Brandon Turner often mentions, "presentation" is very important. So instead of taking snapshots of my bank statements or distributions on an irregular basis, I now show pay stubs every couple weeks. Easier to understand, familiar paperwork for an underwriter and a good "presentation"....same actual earning profile.

Originally posted by @Christopher Erwin :

@Shaun Weekes @Chris Mason

Thanks for the thoughtful feedback and review of various options I should consider. This is why I love posting in BP.

Yes, I have been in close contact with my loan officers in Omaha, and was advised that 2 years of business tax returns is the high preference, though by January I'll be approaching 18 months and will be wrapping up my first full calendar year, which they said could get me over the hump with an underwriter. Of course, no guarantees per the loan officer, as 2 yrs is the standard.

Chris, that's a good note re the pre and post restructure, and how underwriters might consider a blend scenario. An important note to clarify for the article readers is that I materially changed my profession, so it was not a restructure of an existing business / income stream, but the development of an entirely new one. I left my media executive job in LA and co-founded a media advisory firm, and it's been a BIG awakening at the new financing challenges it's created, even with meaningful income for our first 18 months in operation. I write a newsletter for a lot of media execs in LA, and a lot of my readers had asked for guidance on how entrepreneurship might impact their RE investing ambitions. Of course, your restructure note is still highly relevant, so thank you for sharing.

Thanks for the bank statements tip too, I'll look into that. My recent financing "workaround" has been getting my twin brother, who has a very strong financial profile as an officer in the army, to be my co-guarantor on my mortgage. We'll receive a great interest rate that's better than hard money and the statement model you mention, though I'll get a family co-investor, which has its own advantages / disadvantages that I need to be wary of.

I love your last line about tax and mortgage advice...I will definitely quote that in my next newsletter to my investor peers!  

@Stephanie Potter Thanks for the thread contribution. And you raise a good point. That last thing I'd want to do is have my newsletter readers (which includes my loan officers) or the BP community think I'm trying to do a "scheme" or not accurately represent my actual earning profile. My intended message was instead to provide documentation that lenders are familiar with...as @Brandon Turner often mentions, "presentation" is very important. So instead of taking snapshots of my bank statements or distributions on an irregular basis, I now show pay stubs every couple weeks. Easier to understand, familiar paperwork for an underwriter and a good "presentation"....same actual earning profile.

I really don't think a guarantor (unless they're the actual borrower and can qualify without your income) or paystubs (from a company you own more than 25%) every couple weeks is going to fly.  You're going to need two year's tax returns, business and personal and a year to date P&L to qualify or go with a no income verification  product with a higher rate.  It all depends on the initial AUS findings, but if the information you put at the top of this thread is what goes on the 1003, I think that's what Fannie and Freddie will want to see.

Best of luck

Stephanie

Your best bet is to either 1) pursue a commercial loan (you should be able to find a commercial mortgage broker who loans on non-commercial real estate) or 2) find a co-signer with the proper W2 income.

@Stephanie P. Hi there. You mentioned "no income verification loans for investment properties"... Do you by any chance know of any off the top of your head that are nationwide. I'm down here in Houston, Texas and trying to figure out the best route I can take for traditional funding (I do not have a W2 job).

Thanks a bunch.