Buying a house when you're self-employed is definitely possible. But it does require some extra planning.
Introduction: Welcome to the Homeownership Insights Podcast, your leading mortgage podcast, sponsored by Fairway Independent Mortgage Corporation. Listen as experts from across the country share knowledge to help homebuyers and homeowners make the best decisions in their homeownership journey. Our next podcast begins right now.
Casey Morris: Welcome back to the Homeownership Insights podcast. I'm Casey Morris, and today I'm talking about self-employed mortgages with Fairway Loan Officer Laura Mead and Bill Kennedy, who is a business owner and who, in fact, got a self-employed mortgage. So, Bill and Laura, thank you so much for being with me today.
Bill Kennedy: Thanks for having us.
Laura Mead: Yeah, thanks for having me on. I'm excited to participate.
Casey Morris: Great. Well, I thought before we dive into the meat of the topic, I wanted to give you guys a chance to introduce yourselves. So, Laura, if you want to share a bit about your background as a Fairway loan officer in the industry, and then, Bill, if you want to share a bit about your business and who you are.
Laura Mead: Sure. So I'm based out of Orlando, Florida. I'm licensed in 12 states and have been in mortgage and financial services for about 30 years. I love working with self-employed borrowers because I enjoy evaluating tax returns. I tell people I'm a weirdo in that regard and I have great relationships with CPAs who know that when they send a client my way that does own his or her own business, that the tax returns not going to be a big challenge. Or we could work together to help our mutual client.
Casey Morris: Great.
Bill Kennedy: And my name's Bill Kennedy. I own a small business in Miami named Ardan, A-R-D-A-N, Labs, a computer consultancy software developer. We work with – you name a company, we've done some work for them at some point, and we've been in business for 12 years now, actually, this month, 12 years, which is just pretty exciting.
Casey Morris: Wow. That's awesome. Congratulations. Great. So, I thought we could start by just describing what we mean by the term self-employed mortgages. Because, of course, it's not that there is a different loan program if you're self-employed, but it does mean that qualifying can be a little bit more complicated. So, Laura, can you explain exactly what a self-employed borrower, what makes them unique from a lender’s perspective and what that term self-employed mortgages really means?
Laura Mead: Sure. So self-employed borrowers fall into multiple categories. So, as we had mentioned or talked about earlier, it could be the gig economy. But in Bill's case, he actually is incorporated. And so, he files a personal tax return, and he also files Business Corp tax return. So, they have a few entities under his umbrella of Arden Enterprises.
And so, for him, we were looking at multiple S-Corp tax returns as well as his personal 1040 tax return to analyze.
And so, when we're talking about a self-employed borrower profile, it could be someone who files a Schedule C on their personal tax return or if they're not incorporated or they have not elected to subchapter S or C Corp, you know, business model, but they are in fact, a business owner.
And so, we have to look at the bottom line for the business owner, see how they're how they're paying themselves. Do they pay themselves partially with W-2 and partially with the net positive cash flow from the corporation, which is called a K-1 statement?
And so, all of those factors create that self-employed borrower and that's how we start, is that looking at tax returns for them, typically for at least the last two years, sometimes it's if the business has been incorporated, you know, a little bit longer, we'll actually look at three years because for example, during COVID, some folks had a down year and that was an artificially low-income year for many people.
So, we did what I call the before, the during, and the after snapshot. So, we looked at three years of returns and sometimes profit and loss statements to make sure that the current income for this calendar year is inline with the previous two years.
Casey Morris: And can you talk about when you're looking at the tax returns, that's such an important component for qualifying. If you are a freelancer, a gig worker, or you own your own business because you need to be able to show that, you know, you don't have paystubs from an employer. So, you have to be able to prove that you have that income.
But because there are also deductions that you can take as a business owner or a self-employed person, sometimes the tax returns don't necessarily reflect how much income you actually have. And so that can kind of lead people into trouble because they can't, they have the money and they know that they have the income, but they can't actually prove it. So can you talk about, you know, where that discrepancy comes in and how people can avoid that?
Laura Mead: Sure. So, there are deductions that a business owner can take that those who are W-2salary or hourly workers cannot take. And so, we look at them at the bottom line. And in analyzing a business tax return, there are certain things that are what we call soft deductions that can be added back into the income.
So, a business owner, for example, might have acquired realestate or large capital expenditures of equipment. And those are items that canbe depreciated, which is a soft deduction. It's not a hard deduction.
In other words, it's not like payroll or legal expenses where they're literally writing a check to someone. And that does definitely reduce the income, but it's a soft deduction that's allowed through the IRS tax code. And so those are the types of things that we are actually able to addback to the bottom line, because it's not a true net expense to that. So that's an example is depreciation mileage. Some people take mileage and file that on their schedule one as part of the the tax return. And there's an add back factor that we can use that's given as a promotional, you know, an item that we can add back into the income.
Casey Morris: So, I think as you're explaining this, it's, you know, so important to mention for people that clearly you have worked with a lot of self-employed borrowers and have this understanding. And like you said, you know, you enjoy going through tax returns and that you really do need to work with a loan officer who has that understanding and capability that you do. Because if you were to go to someone who had never worked with a self-employed borrower before and didn't understand those things, I could see it being much more difficult to qualify because at first glance it just looks like, Oh, your income's too low. Whereas you really need someone who understands those roles and can make those calculations and figure out, Okay, do you actually have the income? And let's just find the way to prove it.
Casey Morris: I would say that's definitely true. I mean, I look back at myself when I was a young 20-something brand new loan officer and looked at my very first income tax return. And I thought, goodness, I mean, there's like 70 pages here. What, you know, what am I supposed to do with it?
And, you know, fortunately, I had a great manager who, you know, a trainer and some really good underwriters who said, let's take a look. You know, this is how you dissect that tax return. And then networking with great accountants is also helpful because if I encounter something that I've never encountered before and it's going to happen in the mortgage business and any type of financial services, you're never going to know everything. You need to have really good partners and good underwriters that you can connect with.
So, I would say that that's probably a very accurate statement. Make sure that you're connecting with a loan officer who has some experience or has some great resources, some, you know, some good folks that can guide them through.
Casey Morris: Sure. And so along those lines, Bill, I was wondering if you could talk about your experience being a self-employed borrower. So, you know, was Laura the first person you connected with or had you run into instances where you were getting turned down even though you could afford the property?
Bill Kennedy: So I have one business partner who lives for the accounting, the business, and I don't get involved in the accounting side, which is great because I trust him, you know, blindly. And I have my accountants that I talk to and that's been great.
So, for me, this is all really odd because if you ask me what I make, I don't know honestly what my income is, I don't know what anything is because we do all this accounting and I take a very small paycheck and I take a draw every quarter and I try to live well, I try to I live almost paycheck to paycheck.
We keep a majority of the money in the business because we've got payroll, we've got expenses, we've got things we don't touch that anytime I'm applying for even like a credit card or helping with a rental or something like that. I never say I'm self-employed. I just try to say I'm employed.
But lately what's been happening to me, just recently I was going to be a guarantor for a lease for my niece and I said, Yeah, I work here. And they said, Let me see your paystubs. And they're like, You don't make enough to guarantor. You need to be five times the rent.
And I'm like, well, obviously I make a lot more than five times this rent, but I couldn't prove it, right? I had to go and show them some tax document that showed what I actually on paper at least earn. Right? I don't take that home, right?
When it came to the mortgage, there's just no way if you ask me to do a financial statement, ain't going to happen. Like, I have no clue. So, I would always go to my accountant and say I need help. And then that's where I got introduced to Laura, through my accountant. And what I loved about that the most was she would talk to the accountant and the account can answer all the questions. And I was out of it and I knew that it was going to get done and it was going to get done right.
And I didn't have to get into the mess of trying to understand all the financials, which is just what my business partner, he says, go to the bank and do it yourself. You can do it. I'm like, Yeah, well, I'm not you Ed, okay? So I got a lawyer, so I don't have to. I just forget it, and Laura tells me this is what I need. And then she'll go to the accountant and get all the information back to me. That's worth every penny, because I can just continue on throughout my day and not have to worry about anything. It's complicated. It's just super complicated.
Casey Morris: It is. And it can be really, you know, I worked for myself for a long time and trying to manage that side of things, I mean, that's an entirely different skill set. You're doing the accounting and your books and figuring out, and when you try to make one of these large financial transactions, it is, it's really overwhelming.
And so, you really do want someone who can say, I, I know what I'm doing here. I will lead you through this. So totally agree. It's worth every penny.
So, Laura, can you talk a little bit about, I know you had told me that, you know, in Bill's case, it was clear to you that he could afford the property. But there had been, you know, a large business expense of buying a building or something like that. And so, at first glance, it looks like, oh, maybe he doesn't qualify. So, can you talk about how you figured that out and what you did to, you know, to make sure that he was able to get the property?
Laura Mead: Sure. So, Bill's partner, Ed, who is really, really great to work with, I think it was probably his idea to set up an LLC for their real estate acquisitions. And so, I could see on the returns that there were multiple entities and that one of them was definitely for the acquisition of real estate.
And people do this based upon, you know, the advice of, you know, of their tax advisor typically because it allows the heavy depreciation of real estate and other capital assets, which then helps to offset earnings in other corporate entities. So really when you're evaluating tech firms, that's what I'm looking for. If I'm seeing, you know, other schedules or references to other schedules, you know, ones that that are showing, you know, lost income, you just have to dig deep and ask questions. What is this for? So, when someone, for example, buys whether it's a real estate or any type of big asset, I've done some business owners that own like farms, for example. And there's always the acquisition of major, you know, farm equipment, which you can take an accelerated depreciation on. You have to look at that. And if the acquisition of real estate in one calendar year leads to what I call a paper loss, right? It's not an actual loss because it's an investment in the business to purchase equipment or real estate or other big assets.
Then you can get the accountant to connect with you. The accountant can write a letter explaining this was the acquisition of a major asset. So, it's actually a capital investment. They did not technically lose money in that calendar year. Those are things that underwriters will allow us to exclude from a loss, which then allows us to show the accurate cash flow income, excluding those losses, because it's not really a loss. It's really, they bought something to build the business.
Casey Morris: Right. Right. So, and ideally, that will lead to increased income in the following years.
Laura Mead: Yep. Correct. Correct. So, you just, you know, when you're looking at a business owner, you just don't stop at the bottom line and say, oh gosh, I see a big loss. We're just going to stop here. You have to ask other questions and, you know, and dig a little bit deeper. And ideally, you know, we got a great accountant, as Bill was recommended to me by his accountant. Then you can just connect directly and say, let's talk about this year’s tax return, what was going on here and work around it.
Casey Morris: So it sounds like in addition to finding a loan officer who understands these circumstances and knows how to read the tax returns in that way, that it's a good idea if you are planning to buy a home to connect with an accountant who also has some understanding of this that can help you file your taxes in a way that's going to support your homeownership goals and can kind of think with that that long term view about how you're filing versus, you know, just sort of doing it a standard way and saying, okay, this was your income this year. Here it is. It sounds like that could really complicate things. So, a good accountant is, you know, almost as important as having the right loan officer.
Laura Mead: I would agree. I'm sure that Bill does. You know, it's part of your financial team, right?
Bill Kennedy: I mean, every year I'll sit down with the tax accounting company, now Ralph, and we will do a plan. What's our plan this year? What's our goal? What do we expect to be at? And then we kind of figure out our strategy for all the accounting and the taxes and all of that. And then at the end of the year, we hope that we did everything right.
But if your accounting team isn't willing to work with your loan people, that to me would be a no-no for me like that. If I ever had to get a new accountant, that would be one of the first questions. If I had a loan, someone helping me with a loan, would you be willing to talk to them directly? Because it's foreign, right? And so, to be in the middle of that playing telephone means you're going to make mistakes. Plus, I want Laura moving at1000 miles an hour. I don't want her slowing down. And so, the fact that she can talk directly to say, you know, Ralph, who owns the business, is huge for me. I mean, and the fact that she was able to talk to Ed when she needed when I couldn't answer something directly, like, that's huge for me.
Casey Morris: Yeah, absolutely. And is there anything that you wish that you would have known before starting the process or that you would, any tips that you would offer to somebody who is in a similar situation as you, who is self-employed? But, you know, they don't really want to deal with the with the accounting side of things. Anything that you wish you would have put in place or that you would recommend that they have in place or keep track of or get someone to keep track of in order to make the process even easier.
Bill Kennedy: I'm not sure if I have that answer, but I will tell you that I wish I had reached out to Laura earlier because in my head I didn't feel like I could afford the mortgage. And then when we got into February and I saw interest rates were about to go stupid high, I just called her and I said, okay, if we can do it, we can do it, if not. And she made it happen. And then all I was thinking after that was, why didn't I call her earlier? Because I want to make this happen, right? I could have gotten an even lower rate and I waited. So, I think the advice for me next time is don't be defeated before you even start. Just ask. It would have been better for Laura to say No, you can't, because your debt income ratio is too much. And I need you for the next three months to pay off these bills and then we'll be okay. But it would have been better for Laura to tell me what I needed to do than me guessing that I couldn't do it.
Casey Morris: That's a really great point. And I think a lot of people get hung up on that. You know, there's so much information out there and you think, oh, well, I must not be able to buy a house because of X, Y, Z. Whereas if you just start now and talk to a loan officer who can actually look at your finances and say, actually you can afford it, or like you said, we need to get your debt to income ratio lower, but at least then you have a professional who's telling you what you can actually do or not do versus trying to figure it out yourself and then, you know, potentially missing out on opportunities because you didn't have the right advice.
Bill Kennedy: Yeah,that's what I would say. Just ask. If you don't ask, you can't receive.
Casey Morris: Verytrue. Very true. And Laura, do you have any recommendations for somebody,whether they own their own business or they're a gig worker or a freelancer?Maybe they recently started during COVID working for themselves. What tipswould you give them to kind of get their ducks in a row if they are thinkingabout buying a house and are maybe hearing this and didn't realize that itmight be a little bit more complicated, you know, what steps can they take to setthemselves up for success?
Laura Mead: Youknow, as I was listening to Bill talk, I realized that there's an expressionthat I love to use with every client that I'm talking to. What’s your path?
What is your path to homeownership? And to me, the path begins with that initial conversation.
So don't be afraid to have a conversation with your mortgage advisor and with your accountant, because that's how you get the answers. You have to ask the questions and you have to have, you know, really great advice. And sometimes the conversation is, so the path is not immediate. Right? But to Bill's point, if you do this, if you take these steps for the next three months or nine months or whatever the time frame is, then then you'll be in great shape.
And so, I really love just having that initial phone conversation and letting people know it's not about rushing to make a loan application and, you know, and run credit. It's about asking great questions and finding out where you are, what your concerns are as the as the client, as the borrower. And then we can figure out what that path looks like together, you know, and get all those questions answered and remove some concerns and figure out what the timeframe looks like for you.
Casey Morris: Sure. And then in that sense, you are moving forward. Even if you're not buying the house right away, you're making progress in that direction instead of trying to figure it out yourself and then maybe wasting a lot of time or making mistakes or, you know, overlooking an opportunity because you just didn't know that it was there.
Laura Mead: Exactly. Exactly. You get your questions answered. And as Bill says, if you don't ask right, then you're not going to receive. So that's my philosophy. Let's get started early and figure out what's going on and then we know what your path is.
Casey Morris: Yeah, that's great. Great. Well, thank you all so much. This was really you know, it was really interesting to hear your experiences and, you know, to get this perspective on how do you buy a house, how do you, you know, start kind of investing in property when you are self-employed. So, I hope that this is really helpful to people. And yeah, I really appreciate you taking the time.
Laura Mead: Thankyou for having me, Casey. Thank you, Bill, for joining. I really appreciate you.
Bill Kennedy: Thanks. Thanks for having me.
Disclaimers:
Laura Mead
NMLS #1534831
This podcast does not constitute tax advice. Please consult a tax advisor regarding your specific situation.
Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
The information in this podcast is distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway Independent Mortgage Corporation.
Copyright©2022 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. Fairway is not affiliated with any government agencies. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
Fairway is required to disclose the following license information. AZ License #BK-0904162; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License; Georgia Residential Mortgage Licensee #21158; For licensing information, go to www.nmlsconsumeraccess.org; MA Mortgage Broker and Lender License #MC2289; Licensed Nevada Mortgage Lender; Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; Rhode Island Licensed Broker & Lender; Fairway Independent Mortgage Corporation NMLS ID #2289 (www.nmlsconsumeraccess.org).
The information in this podcast is distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway Independent Mortgage Corporation.
Copyright©2022 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. Fairway is not affiliated with any government agencies. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
Fairway is required to disclose the following license information. AZ License #BK-0904162; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License; Georgia Residential Mortgage Licensee #21158; For licensing information, go to www.nmlsconsumeraccess.org; MA Mortgage Broker and Lender License #MC2289; Licensed Nevada Mortgage Lender; Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; Rhode Island Licensed Broker & Lender; Fairway Independent Mortgage Corporation NMLS ID #2289 (www.nmlsconsumeraccess.org).
