No, really, I promise you I make *this* much!
July 11, 2006 6:25 AM Subscribe
How does the way I'm paid affect my ability to secure a loan or mortgage in the future?
I'm young (20) and own my business. As it stands right now, I pay myself by taking a large cash withdrawal from my business account each month, and driving it across the street to my personal checking account's bank to deposit the cash.
I do this because as it's stood to this point, I've had little money by the end of the month, and didn't want to wait for a regular check to clear.
I've heard mumblings of the importance of a regular, verifiable stream of income, especially if one is self-employed, as being necessary when attempting to open a mortgage for a house or something similar. My personal checking account is riddled with large, singular cash deposits, near the same date each month, with matching withdrawals pulled from my business checking account (held at a different bank.)
I realize this is a very cumbersome and ultimately stupid way of handling things, and will be converting to regular checks (and hopefully direct deposit) soon, as Compass doesn't allow basic EFTs from their account without going through a payroll system anyway.
My question is this: How much importance is placed on a verified source of income? Will large cash deposits be recognized or completely ignored?
Furthermore, how does a rent payment factor into things? I'm saving up for a house and thus, living with the parents, and pay a few hundred a month to them, regularly. Said payment is an electronic transfer through MS Money on an account my father has access to--I'm guessing this isn't great for a history of rent payments.
Any other insights about what I can do to be prepared as a self-employed potential homeowner would be fantastic. Even though I'm not going to jump into that for another year or two, I know I should start establishing those practices right now, and I want to make sure my own self-employment doesn't hold me back.
I'm young (20) and own my business. As it stands right now, I pay myself by taking a large cash withdrawal from my business account each month, and driving it across the street to my personal checking account's bank to deposit the cash.
I do this because as it's stood to this point, I've had little money by the end of the month, and didn't want to wait for a regular check to clear.
I've heard mumblings of the importance of a regular, verifiable stream of income, especially if one is self-employed, as being necessary when attempting to open a mortgage for a house or something similar. My personal checking account is riddled with large, singular cash deposits, near the same date each month, with matching withdrawals pulled from my business checking account (held at a different bank.)
I realize this is a very cumbersome and ultimately stupid way of handling things, and will be converting to regular checks (and hopefully direct deposit) soon, as Compass doesn't allow basic EFTs from their account without going through a payroll system anyway.
My question is this: How much importance is placed on a verified source of income? Will large cash deposits be recognized or completely ignored?
Furthermore, how does a rent payment factor into things? I'm saving up for a house and thus, living with the parents, and pay a few hundred a month to them, regularly. Said payment is an electronic transfer through MS Money on an account my father has access to--I'm guessing this isn't great for a history of rent payments.
Any other insights about what I can do to be prepared as a self-employed potential homeowner would be fantastic. Even though I'm not going to jump into that for another year or two, I know I should start establishing those practices right now, and I want to make sure my own self-employment doesn't hold me back.
Your tax returns will have more bearing than the way you put that money in the bank. If you don't have a verifiable income stream you'll be paying more for your mortgage, plain and simple. I've never heard of a rent payment having any direct bearing on a mortgage, except insofar as it contributes to your overall credit rating.
The bottom line is you should talk to a mortgage broker in your area. You'll be under no obligation to use him when it comes time, but I would guess most would be more than happy to spend an hour on the phone with someone who is thinking as forward as you are.
posted by mzurer at 7:09 AM on July 11, 2006
The bottom line is you should talk to a mortgage broker in your area. You'll be under no obligation to use him when it comes time, but I would guess most would be more than happy to spend an hour on the phone with someone who is thinking as forward as you are.
posted by mzurer at 7:09 AM on July 11, 2006
The catch phrase is, I believe "Stated Income"; yes, you'll pay more; self-employed people almost always do.
posted by baylink at 7:17 AM on July 11, 2006
posted by baylink at 7:17 AM on July 11, 2006
I agree with COD. I have a friend who owns his own business and has had to do all of his mortgages (and refis) via a No Documentation loan. The rates are higher but really that is the only way around it. I think they still make you show your income tax returns, even for a no-doc mortgage.
Definately talk to a broker as they are the only ones who could give you a definitive answer.
posted by aurigus at 7:19 AM on July 11, 2006
Definately talk to a broker as they are the only ones who could give you a definitive answer.
posted by aurigus at 7:19 AM on July 11, 2006
Yep, it's a "stated income" loan (I state that I make X per year, no checking up on me allowed), and you'll pay more for it. And, no, you don't need to show tax returns for a no-doc loan. You can go "stated, low-doc", and show one two years of deposit history in your bank account. Or you can show your tax return -- nobody lies to the IRS and says they make MORE money than they actually do, so banks usually accept tax returns as proof of income.
posted by Merdryn at 7:37 AM on July 11, 2006
posted by Merdryn at 7:37 AM on July 11, 2006
Response by poster: The business is itself a separate entity, though it's an LLC... If I were to begin filing W-2's for myself and doing electronic deposits, would this change anything?
Further, I'm a bit confused—if I'm willing to show my tax returns, will that count as enough proof of income, for the past few year's worth? (For a non-no-doc... I... guess?)
Thanks for your help so far!
posted by disillusioned at 7:45 AM on July 11, 2006
Further, I'm a bit confused—if I'm willing to show my tax returns, will that count as enough proof of income, for the past few year's worth? (For a non-no-doc... I... guess?)
Thanks for your help so far!
posted by disillusioned at 7:45 AM on July 11, 2006
For most lenders, tax returns are considered proof of income for self-employed loan-seekers. Then you wouldn't be in the "stated income" or "low doc" or "no doc" categories, you'd be a normal, every day debtor with proof of income.
Be advised that some lenders may want to see proof that you paid your quarterly estimated taxes.
You should speak to an accountant regarding your business setup -- paying yourself a modest salary, and then taking "draws" or dividends or some other disbursement may be better when tax time comes around. It's worth the money to make sure you're above board, and will likely save you lots of cash when tax time comes around.
posted by Merdryn at 8:54 AM on July 11, 2006
Be advised that some lenders may want to see proof that you paid your quarterly estimated taxes.
You should speak to an accountant regarding your business setup -- paying yourself a modest salary, and then taking "draws" or dividends or some other disbursement may be better when tax time comes around. It's worth the money to make sure you're above board, and will likely save you lots of cash when tax time comes around.
posted by Merdryn at 8:54 AM on July 11, 2006
A letter signed by our landlord detailing our rental history (how long we've rented, how much we pay) seemed to satisfy our broker for a full doc loan. We were told that the other option was to produce cancelled checks for a year's worth of rent payments, which would have been a pain.
posted by aneel at 8:55 AM on July 11, 2006
posted by aneel at 8:55 AM on July 11, 2006
Tax returns always struck me as dubious proof of income; what's to say that the return you show the lender is the same one you sent to the IRS? With TurboTax it'd take about five minutes to "prove" I made a million dollars last year, and that counts the four-minute warm-up time on an ancient laser printer. I am pretty sure a bank can't just call up the IRS to verify the numbers. Or can they?
posted by kindall at 10:23 AM on July 11, 2006
posted by kindall at 10:23 AM on July 11, 2006
Not exactly call up, but the validity of your return can be verified. (sorry, was in a hurry when I posted that last response)
posted by Merdryn at 10:38 AM on July 11, 2006
posted by Merdryn at 10:38 AM on July 11, 2006
Best answer: Once upon a time I was a loan officer for a brokerage and then for a bank. (Yes, before I went to college. Most loan officers haven't been to college.) This was several years ago and most of what I know became outdated a week after I quit. I didn't write FHA loans. I also only dealt with the larger lenders when I was a broker (Countrywide, Chase, but mostly Interfirst) and with a medium sized lender when I was working for a bank. There are lots of different programs and there are lots of different answers to you questions, most of which will conflict with each other. Here's is what is probably still true...
Run away from any No-Doc program offered to you. Actually, scream first and then run. It's probably vaporware anyway.
Stated Income programs are used for two kinds of people. Self employed people who screw around with their taxes and self employed people whose taxes are too complicated for a loan officer to bother deciphering.
Most people who end up in a stated program could have been entered into a alt doc program but the loan officer did not want to write a loan that would take him more time and pay him less money than a stated income program.
To qualify for a basic stated income program your lowest credit score had to be at least 650 (i'm sure that's changed by now) Higher credit scores would allow you a high loan to value on your home. You also had to have at least three trade lines (different credit cards or auto loans, for example) for most programs.
The basic documentation for a stated income program was you tax return. I have no idea what the exact standards where for it because the underwriters where the ones that controlled it, but I can tell you that I never had a stated value for income rejected by them.
There are programs that verified income through bank accounts. I never knew anyone who used them or even knew how to write them. (see the previously mentioned alt doc program. )
Your best bet for getting a good deal on your mortgage is to go to a local credit union. They stole deals from me all the time. In fact, they stole them so badly that in order to match their deals, I would have had to pay money to get someone else's mortgage to close.
Verifiable electronic transfers should not be a problem for you. If you can, do them through the bank you plan on borrowing from.
As far as what you can do to make your application process easier... Put the down payment you plan to use for you house in a separate SAVINGS account and leave it there for at least six months. It's called seasoning the money; some programs require it, others don't care where the money comes from.
Don't open any new lines of credit.
Look into down payment assistance programs, some of them are very easy to qualify for (especially since depending on how you file your taxes, you may be officially below the poverty line) and it's free money.
Find a local credit union.
One last thing... In the unlikely event that you qualify for a 103% of 107% purchase program, avoid them unless you plan on flipping the property and actually know what you are doing.
"I am pretty sure a bank can't just call up the IRS to verify the numbers. Or can they?"
I'm pretty sure that one of those, 15 or so, documents in the application is actually a release that allows the lender to verify you tax returns with the IRS. I suspect it is not used.
"If I were to begin filing W-2's for myself and doing electronic deposits, would this change anything?"
Yes and no. That wasn't helpful was it? It depends on the program but in general, yes.
posted by 517 at 10:54 AM on July 11, 2006
Run away from any No-Doc program offered to you. Actually, scream first and then run. It's probably vaporware anyway.
Stated Income programs are used for two kinds of people. Self employed people who screw around with their taxes and self employed people whose taxes are too complicated for a loan officer to bother deciphering.
Most people who end up in a stated program could have been entered into a alt doc program but the loan officer did not want to write a loan that would take him more time and pay him less money than a stated income program.
To qualify for a basic stated income program your lowest credit score had to be at least 650 (i'm sure that's changed by now) Higher credit scores would allow you a high loan to value on your home. You also had to have at least three trade lines (different credit cards or auto loans, for example) for most programs.
The basic documentation for a stated income program was you tax return. I have no idea what the exact standards where for it because the underwriters where the ones that controlled it, but I can tell you that I never had a stated value for income rejected by them.
There are programs that verified income through bank accounts. I never knew anyone who used them or even knew how to write them. (see the previously mentioned alt doc program. )
Your best bet for getting a good deal on your mortgage is to go to a local credit union. They stole deals from me all the time. In fact, they stole them so badly that in order to match their deals, I would have had to pay money to get someone else's mortgage to close.
Verifiable electronic transfers should not be a problem for you. If you can, do them through the bank you plan on borrowing from.
As far as what you can do to make your application process easier... Put the down payment you plan to use for you house in a separate SAVINGS account and leave it there for at least six months. It's called seasoning the money; some programs require it, others don't care where the money comes from.
Don't open any new lines of credit.
Look into down payment assistance programs, some of them are very easy to qualify for (especially since depending on how you file your taxes, you may be officially below the poverty line) and it's free money.
Find a local credit union.
One last thing... In the unlikely event that you qualify for a 103% of 107% purchase program, avoid them unless you plan on flipping the property and actually know what you are doing.
"I am pretty sure a bank can't just call up the IRS to verify the numbers. Or can they?"
I'm pretty sure that one of those, 15 or so, documents in the application is actually a release that allows the lender to verify you tax returns with the IRS. I suspect it is not used.
"If I were to begin filing W-2's for myself and doing electronic deposits, would this change anything?"
Yes and no. That wasn't helpful was it? It depends on the program but in general, yes.
posted by 517 at 10:54 AM on July 11, 2006
This thread is closed to new comments.
posted by COD at 7:00 AM on July 11, 2006