November 12, 2008 at 12:21 pm · Filed under Affordable Housing, Gulf Coast Housing, Pensacola, Perdido Key, Residential, The Mortgage Market
The expenses that you write off on your taxes could keep you from getting a mortgage.
The entrepreneurial spirit is one of the finer points of our society. The fact that we live in a country with so many freedoms to carve your niche in the marketplace is a beautiful thing. But that American dream of self employment can also cause you to loose another American dream, the dream of home ownership.
You may have heard the term “stated income” loans. These are loan programs that were designed for self employed people that had difficult to document income, or they had significant write offs on their tax returns that prevented them from qualifying for a home. With stated income loans, you were allowed to “state” your income without documenting or verifying where this income came from. It was a simple solution for some people with good credit and good assets to qualify for a loan even if they could not prove their actual income stream.
With this loan program also came abuses of the system leading to desperate borrowers overstating their income to qualify for their dream home. Or, unscrupulous loan officers that would do anything to get the deal done. Regardless, many home owners bought homes that they could not afford, and you have seen the aftermath that was caused.
So, now that stated income loans have gone the way of the dinosour, self employed borrowers have to be more aware of their tax returns if they plan to buy a house. Standard underwriting guidelines are that you take the last 2 years filed tax returns, use the Adjusted Gross Income (AGI) on the bottom right of the 1040 form, divide that by 24, and that is the number that will be used to qualify you for a loan. Be aware that if you “made” $100k, but you wrote off $70k in expenses, your income is $30,000. There are a few items that can be added back into your income such as depreciation since it is not an actual cash expense.
I am neither an accountant nor a lawyer, so I will not presume to give legal or accounting advice. However, I am an expert in mortgage financing, and rest assured, an underwriter is not going to use your gross income for qualifying.
Example:
Say you own a landscape company with gross receipts of $120,000. But, your cost of goods (gas, equipment, mileage, supplies) was $72,000. This would mean that your adjusted gross income would be $48,000. On a monthly basis, your income would average out to be $4000 per month. You are generally allowed to have a debt ratio of 40% to 45% (depending on the loan program) for your total expenses. In this example, 45% would be $1800.
If you have a car payment of $350/ month and other debt payments of $400/month (credit cards, student loans, child support, alimony, etc.), it would leave you with $1050 to use for mortgage financing. Take away property taxes and home owners insurance in that payment, you are probably left with about $900 for the actual mortgage payment. At 6% on a 30 year term, this means that you would qualify for a loan amount of $150,000.
This is a good example of exactly the calculations I use when pre-qualifying someone for a home loan.
As we near the end of the year, and tax season is coming up, this will be an important conversation to have with your accountant if you have any plans to buy a home in the next few years. your decision to save a few thousand dollars on your tax bill could very well keep you from buying a home.
If you would like to discuss your personal situation, call me at 888-257-8383 or go to Pensacola Mortgage Solutions.
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November 10, 2008 at 12:02 pm · Filed under Affordable Housing, Credit Crisis, Gulf Coast Housing, Pensacola, Residential, The Mortgage Market
Stocks are higher this morning following a rally in the Chinese market after a government stimulus plan for $586 Billion was announced to help relieve their struggling economy. As the stock market shows signs of life, it will continue to put pressure on bonds this week to hold their current levels above established resistance.
Also scheduled this week, the Treasury Department will be auctioning off $55 Billion in treasury notes which will no doubt put even greater pressure on the bond yield. If the yield on mortgage bonds falls, mortgage rates will go up to meet the market demand.
Watch rates carefully this week. If you have a loan in process, it would probably be prudent to lock ahead of potentially bad news in the financial markets. If you are still looking for a house, or are not ready to lock, it may cost you on your mortgage rates later this week.
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November 3, 2008 at 4:51 pm · Filed under Affordable Housing, Bankruptcy, Foreclosure Help
Bankruptcy is an uncomfortable subject for a variety of reasons. The most obvious is the potential havoc it can wreak on your finances. Running a close second is the negative stigma which is often attached to the process. This negativity is important to mention because strong emotions can sometimes lead to unsound financial decisions with devastating results.
Bankruptcy becomes a viable option for someone who is “upside down” in terms of cash flow. In other words, when a person has more money going out each month than coming in, bankruptcy should be considered if no reversal of this negative cash flow is within sight. The longer someone waits to explore the various options available, the more serious his or her situation may become.
One of the worst things people can do in this situation is to borrow more money to try and pay off their debts. On paper, this is clearly an unwise financial decision. In the real world, however, it is very common for individuals to pursue this strategy in an attempt to buy time and hold off on filing for bankruptcy. On the surface, this is certainly a noble notion; however it can often compound the problem and serves only to delay the inevitable.
For many homeowners in the midst of this upside down cash flow, speaking to a qualified mortgage professional is a much better option. An experienced loan officer can objectively look at your finances and help you determine if restructuring your mortgage would not only help, but possibly even alleviate any need for bankruptcy.
If bankruptcy is the only option, seek out a reputable bankruptcy attorney and credit counselor. A qualified mortgage specialist can provide references for you as well, as he or she works with these professionals on a regular basis. Reliable references are essential in this case because experienced professionals greatly increase the odds of a successful bankruptcy experience. It’s that simple.
When filing for bankruptcy, be completely honest and accurate regarding every aspect of your financial situation. This includes any changes to your income which may occur throughout the process. Bankruptcy is a federal procedure, adjudicated by real judges, and scrutinized by representatives who coordinate with the Department of Justice, the FBI, and the IRS.
Here are some additional steps you can take to make the bankruptcy process as painless as possible:
- Save all paperwork regarding your bankruptcy, and keep it organized. This will prove beneficial after your bankruptcy as you now have all of the pertinent information in one place. Also, be sure to write down your discharge date. It’s surprising how many people forget to do this.
- Establish a household budget. This can be accomplished in many ways, but there are several inexpensive computer programs available which do an excellent job.
- Throughout the bankruptcy, do your best to not only live below your means, but to save as much cash as possible. You never know what you may need it for once the process is completed.
- Be prepared for a barrage of junk mail. There will be sharks on the loose who are hoping to capitalize on your need for credit.
Tips for Rebuilding Credit:
- If you must buy a car, focus on transportation as opposed to style. Buy an inexpensive, used car, and try to get a loan for it. It’s a good idea to figure out what your budget allows in terms of a dollar amount first. This means obtaining financing prior to looking for a car.
- Get a secured credit card. Secured credit cards allow for the cardholder to deposit a said amount of money into an account, thus establishing the spending limit of the card. Missed payments result in deductions from the account. Some of these cards will reward responsible borrowers by upping the limit without an additional deposit. Some will even convert the account into a traditional credit card. (Be wary of offers of “easy credit” or any card which asks you to call a 900 number. You will be charged for the call.)
- Meet with a credit repair specialist. Not only can they help you clean up the damage to your credit report, they can advise you on specific ways to rebuild the credit you lost as well.
While it does take time, there is definitely life (and credit) after bankruptcy. Some mortgage lenders will even lend to you within a year or so after a bankruptcy. If you’re in serious financial trouble, the trick is to get the help and advice you need from professionals you trust.
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