Preapproval with a per diem income?

Question

Hey BP community. I am a dentist (first year in the real world) and am on a production-based salary. I went to get preapproved by a lender for my first investment property and she stated that I need at least one year of income with a  per diem salary before I can be pre-approved. Is this a common occurrence with commission/production-based jobs? And what other routes are possible instead of waiting for a year. Let me know, thanks!

Agus Hartono · Answer

@Michael Mackney, some lenders provide Non Agency mortgage that can use Asset Base, therefore it can disregard your income as long as you have enough down payment. The minimum down payment is also usually depend on your credit score. The higher your score, the lower the minimum down payment needed. The rate will be slightly higher than regular conforming loans, but this can be a step stone for you to secure a deal first, then later once your income is stable and you have 1 year history of income in your 1040, then you can refinance later with a lower rate. I hope this helps and good luck with your investing.

Nick Belsky · Answer

@Michael Mackney

There are some programs that will base income on 3 months of bank statements, but rates are very high and terms are tough.  12 months of deposits into your account is better.  Lenders will look at the total each month and average to get your monthly qualifying income.  However, many also consider an expense ratio and are handled differently.  E.g If your average deposits over 12 months is $10,000, an expense ratio of 50% may be applied.  This would reduce your qualifying monthly income to $5,000 each month which is what will be used to determine front and back end ratios for your loan.

The expense ratio is often offset or validated by a CPA or other licensed tax professional.  If you don't have one, then you will be subject to whatever ratio the lender assigns to you.  I had a client a few weeks ago get the expense ratio down to only 15% due to her CPA validating her actual expense ratio.  It would have been 50% otherwise.

I am running 12 month bank statement loans for investment properties between 5-6% right now.  Max 80% LTV and a 760+ FICO.  Lots of things factor into the rate with these loans.  In general, you will need a CPA to get the lowest expense ratio possible, high FICO, low LTVs and plenty of reserves (at least 6 months) to get the best rates.

You could also look into a conventional but qualifying income would need to be at least 2 years and lenders will use tax docs to calculate income which is usually super low compare to reality.  Business owners and commission based folks make their incomes look low to have less tax liability.  That's great for tax purposes, but sucks when getting  mortgage.

Cheers!

Nick Belsky