Securing lending as a business owner? Help needed!

5 Replies

HI BP Members!

I currently own a retail business in Brooklyn NY and am ready to expand my investments into real estate. OOS multi-family is the goal. I'd like to take the first step of getting an idea of what I could qualify for except it has just occurred to me that having a very good and very creative accountant has also left my income (on paper) looking a bit sad, and not quite an accurate representation. 

I am an S-Corp and pay myself a small salary of $40K but make the lions share of my profits through my dividends. I have had lots of deductions and thus has cut deeply into my financial "portrait." I do however have excellent credit (780) and 6 figures in the bank. 

To get to the point- Are lenders taking your taxes as the most important part of your financial picture? This year I will be bumping up my salary to take this into account, but wondering if I should hold off on trying to get pre-qualified because my income currently shows so low. Otherwise do I just see what I can get qualified for based on my measly earnings but excellent credit and liquidity? Thanks in advance! 

Also I should note, in case this makes a difference, I have not chosen a particular market for investment yet,  I am finding that to be my biggest challenge!

@Audrey Spina

lender's will look at your full tax return and not just the salary that the S-corp pays to you. Does your S-corp show income after it pays you your salary? If it does - the lenders will count that as income earned. 

Lenders look at several things such as DTI, Cash-required to close, and credit score to see if you will qualify for a loan.

DTI(Debt-to-Income) - Banks want to see that the income you earn can pay off your current monthly obligations plus the new mortgage you will acquire. I see 36% and 45% DTI's are okay to have to qualify.

This is the area that may impact you the most since you indicated you don't have much taxable income. 
If you rent your personal residence; a large monthly rent can affect you. Brooklyn rent is high!
Also - large monthly credit card debt can impact you. If you have some - you may want to consider paying it off.

Cash-required to close - This area doesn't seem like you will have any trouble since you have money in the bank

Credit score - again this area doesn't seem like it will impact you since you have excellent credit.

You may want to consider speaking with some lenders. Ultimately - they are the ones who will have the final say.

You've got a couple options. If you have a large depreciation and vehicle mileage that you claim on your tax returns that can be added back in as income. If that doesn't work you can go portfolio lending and they'll lend on bank statements, so if you have a lot of cash coming in, they'll use that. Alternately you can go stated income loan or they'll take 75% of what the current marketable rent is for that unit as income. The rate is going to be higher than traditional lending but you either pay less in tax and a higher rate or higher in taxes and a lower rate, it's a trade off.

I only do the west coast but I've got a couple lenders I can put you in touch with on the east coast.

@Basit Siddiqi :

@Audrey Spina

lender's will look at your full tax return and not just the salary that the S-corp pays to you. Does your S-corp show income after it pays you your salary? If it does - the lenders will count that as income earned. 

Lenders look at several things such as DTI, Cash-required to close, and credit score to see if you will qualify for a loan.

DTI(Debt-to-Income) - Banks want to see that the income you earn can pay off your current monthly obligations plus the new mortgage you will acquire. I see 36% and 45% DTI's are okay to have to qualify.

This is the area that may impact you the most since you indicated you don't have much taxable income. 
If you rent your personal residence; a large monthly rent can affect you. Brooklyn rent is high!
Also - large monthly credit card debt can impact you. If you have some - you may want to consider paying it off.

Cash-required to close - This area doesn't seem like you will have any trouble since you have money in the bank

Credit score - again this area doesn't seem like it will impact you since you have excellent credit.

You may want to consider speaking with some lenders. Ultimately - they are the ones who will have the final say.

Thanks for the comprehensive reply! I do show some dividends after my salary is paid but its still only showing about $40K in total income. In reality its a different picture but I know this won't matter to a lender. 

I have no debt and all credit cards (typically about $6K a month are paid off monthly). This has definitely helped contribute to my credit score. 

Rent IS expensive in Brooklyn! I pay two of them between my apartment and shop so Im sure that won't look favorable but besides things like insurance and utilities, major items are paid off. I wonder if a lender will do a soft inquiry without a hard inquiry into my credit? 

Originally posted by @Rick Momsen :

You've got a couple options. If you have a large depreciation and vehicle mileage that you claim on your tax returns that can be added back in as income. If that doesn't work you can go portfolio lending and they'll lend on bank statements, so if you have a lot of cash coming in, they'll use that. Alternately you can go stated income loan or they'll take 75% of what the current marketable rent is for that unit as income. The rate is going to be higher than traditional lending but you either pay less in tax and a higher rate or higher in taxes and a lower rate, it's a trade off.

I only do the west coast but I've got a couple lenders I can put you in touch with on the east coast.

 Thanks for the info Rick! I need to educate myself more on some alternate funding strategies in case this low salary sets me back. I don't use my vehicle for work or have any major depreciation. My accountant is doing a fantastic job with my taxes, a bit too good now with the idea of securing lending is looming. I am definitely going to look at portfolio lending and educate myself further. I haven't chosen a market yet, and it could very well end up being the west coast though I think mid-west is probably more likely as I think I'll need to start with securing a loan for a property less than $200k. Though I know I can afford more I'm not sure I can prove that in the eyes of a lender. Are lenders open to discussing a strategy with someone without a hard inquiry into their credit?