Self-employed borrowers Things to consider when applying for a loan

It is important to be aware of the differences in qualification for a freelance borrower versus a salaried / hourly borrower. I just ran into the following scenario a few months ago, so make sure you are VERY communicative, open, and completely transparent about your business when speaking with your loan officer. And it is very important to make sure that you are PRE-APPROVED by a lender BEFORE you start looking for a property or refinancing. Always remember that your loan officer is on YOUR side and sharing as much information as possible can be very helpful in the process:
My client mentioned to me that he had been self-employed for over 20 years, but changed his filing status as a sole proprietorship (Schedule C on the Personal Income Tax Return) to S Corporation in 2021 , after having produced the 2020 declarations as the only prop. Years ago that wouldn’t be a problem. However, after checking with Fannie Mae and Freddie Mac, it was determined that they would NOT allow self-employed income from a company whose tax reporting structure has changed … It might sound a bit shocking, especially since nothing notable has changed regarding the company except the tax structure. And just to be clear, since most lenders sell to Fannie and Freddie, ALL of those lenders would experience the same result. So make sure that even if YOU think there shouldn’t be a problem, it is wise to check with the professional before going ahead!
A few other considerations independent borrowers should take into account when considering pre-approval:
If your business has been in business for 5 years or more, you CAN use ONLY 1 year of tax returns (which can be a huge benefit in most cases). Otherwise, the lender requires 2 years of taxes and will average the net income of the company IF the most recent year is higher. If the previous year is higher, THAT year (the lower year) will be used to determine income.
If you are paying yourself a W-2 salary through the company, it is wise to be very consistent with that salary. Consider the following: In 2019, the company paid you a salary of $ 60,000 and the company’s net income. was $ 50,000. In 2020, the company paid you a salary of $ 30,000 and the net income of the company. was $ 70,000. The lender will qualify you as follows: 1) First, the lender will want to know why the large salary reduction 2) The lender will ONLY use the salary of $ 30,000 3) Additionally, the lender AVERAGES the net income of $ 50,000 and $ 70 $ 000 net income of $ 60,000. So the total income will be $ 30,000 + $ 60,000 for $ 90,000. Even if in 2019 and 2020, these totals were respectively $ 110,000 and $ 100,000! This is why it is VERY WISE to consult a VERY experienced loan officer when considering a restructuring!
Curt Kravitz is a 35 year veteran loan officer with tremendous experience helping self-employed borrowers achieve their goals! Call him at 661-705-2500. Option 1.

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