Howdy, Partner!  How’s the Income Look on Your Mortgage Application?

I don’t care how successful your S-Corporation or partnership may be.  When you go to get a home loan, there will be a new sheriff in town — your mortgage lender.  So before your loan process gets hung up at high noon, I thought I’d let you in on a secret about how most lenders will qualify your income.  Let’s go, amigo.  We’re burnin’ daylight.

Check Yourself

Most of what we focus on below will pertain to the self-employed partner or owner in an S-corp.  The widely-accepted definition of ‘self-employed’ is greater than a 25% ownership interest in any business entity.  So, look at your K-1 form if you don’t already know.  If your ownership interest exceeds 25%, you can expect that your mortgage lender will ask you for not only your personal income documentation (as applicable); paystubs, W-2 forms, K-1 forms and personal tax returns (1040 Federal Tax Return), but also the Federal tax returns of the business entity itself.  In the case of a partnership or LLC, this will be a Form 1065 and in the case of an S-Corporation, this will be an 1120S.  “But wait!” you say, “They can claw the business returns out of my cold, dead hands!”  OK, that’s why we’re having this conversation, partner.  Get this straight with your tax professional and the other owners before finding yourself in this one-horse town.  If you’re greater than a 25% owner, we need your business documents too.

Saloon Math

Assuming you’re greater than a 25% owner and we now have the ability to review your documents, we’re going to start analyzing your income by reviewing your K-1 forms.  A very key piece of your qualification, and one that most do not know about, is that we are primarily looking for distributed income.  Owners who receive ordinary income (Box 1) but do not have distributed income will often have difficulty qualifying with K-1 income.  Yes, they could still qualify with so long as the business itself is not showing a loss in that year(s), but frequently a business owner will have both compensation to officers (W-2) and K-1 income.  When income is not distributed, we will next turn to the balance sheet on the business tax return and seek to prove business liquidity.  We will almost always require additional support from the tax preparer to state that distribution of previously undistributed income would not cause financial harm to the business.  These kinds of requirements often rankle not only the tax preparer but the business owner himself/herself.  So again, before galloping into this town, guns a-blazin’, have your posse ready to save your hide.

The OK Corral

Here’s what I find most often.  If a business (partnership, LLC or S-corp) is doing well and paying both wages and distributed earnings to its owners, it’s a fairly straightforward qualification.  Yes, there is more documentation required but if the business keeps good books, none of this is tragically problematic for the borrower.  Where a business is not distributing earnings, things can get a little trickier, but certainly not impossible.  Lastly, and thankfully more rarely, are businesses where they are paying out wages (W-2 earnings) but posting a loss on the K-1 and/or business returns.  These borrowers should expect for that cover to be blown shortly after getting out of the saddle.

If you are a self-employed business owner, especially a partner, LLC member or S-Corp owner and you are having difficulty getting a great loan, don’t assume that your loan officer understands how to qualify your income.  Sadly, many in our profession lack the knowledge, expertise and experience and there is no education or licensing requirement that could assure you they know what they’re doing.  Ultimately you would find out once your loan goes through underwriting, though you may not have the luxury of waiting.  If you need clear, expedient answers on these scenarios, whether you are a borrower yourself or a tax professional assisting a borrower with a mortgage application, get in touch any time and I’ll be happy to help.

Giddy up, 

 

Rob Spinosa
Senior Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 – (866) 934-7283

Closing in the Name Of

There will be no profanity in this post, just in case you get the cultural reference in the title. I won’t even repeatedly scream at you. Instead we’re going to cover a topic that sidesteps injustice, drama or even frequent occurrence, but it deals with a scenario that comes up occasionally and when it does, there is quite a bit we should know before taking action. So let’s talk about closing a residential real estate transaction in the name of an LLC or other business entity, like a partnership or a corporation. Can you do that? What’s different and where does one start the process?

[Too lazy to read the rest? Watch the video instead!]

Guarantee, Guarantor, Guarantas

The first two words above, anyway, are the key concept here. It is indeed possible for a one- to four-unit residential property to be closed or vested in the name of a business entity, but when this happens, essentially what’s transpiring on the lending side is that one or more of the business owners are using their personal income, asset and credit profile to guarantee the loan on behalf of the entity. So, in essence, the “borrower” becomes a “guarantor.” Again, critical to grasp the concept that the business itself is not the borrower(s). If that were the case, we’d be talking about a commercial loan and not a residential mortgage, as here.

Wage Against the Machine

Consistent with a traditional mortgage for a traditional borrower with a traditional credit profile, our business entity borrower will have to provide an additional layer of documentation pertaining to the business itself. When vesting or closing in the name of an LLC, partnership or corporation, the owners of the business, if not the same as the borrowers/guarantors for our loan, will need to provide articles of incorporation, partnership agreements and other forms and questionnaires to support that the owners are all aware that a mortgage is being taken on the subject property. Perhaps most importantly, when seeking to obtain a loan in the name of a business entity, expectations need to be set up front to assure that the “borrowers” as well as the other majority owners in the business understand what will be involved.

So yes, we can close in an LLC. We can close in a partnership or corporation too. But we have to view things differently from Day 1 in order to get it right and our clients must understand what will be expected of them and their co-owners. With the new tax laws and with an increasing number of real estate investors holding their properties in an entity for both legal and tax purposes, closing in an LLC or other entity is becoming more common. If you have questions about how to efficiently get a mortgage in the name of such an entity, let me know how I can assist.

Some of those that work forces, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960

Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283