Vail Daily column: Calculating income for self-employed is complicated

If you have applied for mortgage financing recently, then you can attest to the fact that the process is quite complex in the current regulatory and economic environment. I can further attest to this as a loan officer who is entrenched in the residential real estate finance business. It seems as though no two lending scenarios are quite the same right now due to a myriad of various factors which can add further difficulty. For purposes of this column, I am going to focus on the employment and income aspect of mortgage financing, and in particular employment and income for self-employed individuals.

COMPLEX PROCESS

Opening statements can be expanded upon by stating that if you are self-employed and have applied for mortgage financing, then you know to a greater degree how complex the process for obtaining mortgage financing can be. No longer are self-employed individuals able to use “stated income” type loan programs in order to qualify for a loan and simplify the process of underwriting self-employed borrowers. Tax returns and all supporting income documentation is now meticulously reviewed and analyzed.

Net income figures from the self-employment are absolutely factored into the calculations, but that is not the final number to be used by underwriters and lenders for loan qualification. Specific line items that may be deep in the tax returns such as depletion, depreciation, short term debts payable in less than a year, 2106 expenses and many other line items are also factored into the final income calculation. Any one of these deductions or debts can have a major impact on the final number used by an underwriter on qualifying income. However, self-employed individuals need not be deterred from applying for a loan. There are experienced and educated loan officers that properly know and understand how to calculate complex income scenarios for these individuals to facilitate loan qualification.

LENDING OPTIONS

While the income is meticulously calculated, there are in fact multiple lending options that can still be utilize for the self-employed borrower. Depending on the amount of income, the deductions taken and the manner in which they are taken, a loan officer may choose to utilize three, two or even one years’ of tax returns for those who work for themselves. While calculating the income based off of one year of tax returns might be the best course for one borrower, another borrower may need to show two years of returns to have sufficient income to qualify.

Thus, if self-employed borrowers have financing needs in the near or even farther term, then it is best to meet with a seasoned and experienced loan officer to see exactly where they are in regards to the allowable income.

LOAN OFFICERS

While loan officers are certainly not CPAs, they can advise such borrowers as to how much they can borrow with the income they report. Or they can assist in determining how much more income they may need to show on their tax returns in order to meet their financing needs. Borrowers can then meet with their certified tax planner or accountant to see if achieving the income requirement is feasible. Given that we are approaching the end of a calendar year, which is also the fiscal year end for most businesses, now is the time for these borrowers to start the conversation with a seasoned mortgage loan originator.

Calculating income for the self-employed borrower is just one of the countless complexities and nuances within the mortgage industry. Having their income properly calculated can be the difference between being able to borrow money and not for most borrowers who work for themselves. But rest assured, opportunities do exist for these borrowers.

William A. DesPortes, of Central Rockies Mortgage Corp,. can be reached at 970-845-7000, ext. 103, and william@dsmortgage.org.