This past weekend I was having a conversation about home refinancing options with a potential client. The basis of the discussion was that they were a single income family and the husband is self employed. Though they have no problems meeting their monthly cash flow requirements, the actual stated income after write-offs was certainly a small number. And in this case, probably too small to be able to secure a new loan.
After throwing around a few ideas, she asked if they should overstate their income on the 1040 by eliminating some of the write-offs they were able to take. My first reaction was an emphatic "No". After all, why give the government any more money than they are entitled to. But after sleeping on it, my answer should have been "I don’t know". Really, I do not know. How could I know what tax bracket they are, how much interest they pay on their existing loans, what is the interest rate, what is the margin on the ARM, etc., etc? I hope you get my point. There are so many variables that should be analyzed in a major financial decision that it can be mind-boggling. And if you are self employed, maybe the best conversation that you can have is with your accountant. After all, he probably knows your business and the effects that your financial decisions will have better than anyone.
Most people, and some experts, rely much too heavily on rules of thumb to make their decisions. And many times, these rules of thumb can assist us in making the wrong choice. So my advice to myself is to not react based on my personal rules of thumb but to ask more probing questions. Maybe, in both of our cases, we will know when someone else is acting on theirs. Really, if someone gave me advice based on only a fraction of the details, I would hope that I would recognize the need to give more information. With that said, here is an interesting article on mortgages and self employment from USA Today.
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Daily Real Estate News | October 3, 2007Self-Employed Workers Struggle to Get a Mortgage
It is growing increasingly difficult for the self-employed to get a mortgage.
Some lenders that specialized in home loans to self-employed workers and small-business owners have gone out of business. And many lenders that still offer such loans have tightened their standards, making it harder for self-employed borrowers to qualify.
Here’s what self-employed borrowers need in order to qualify for a mortgage in this new environment, according to Marc Savitt, president of the National Association of Mortgage Brokers.
- More documentation. Along with two years of tax returns, self-employed borrowers might be asked to provide a profit-and-loss statement, bank statements, and proof that they’ve been in business for at least two years. A letter from their accountant probably won’t be good enough.
- Fewer tax deductions. Savitt says self-employed workers who plan to buy a home in the next year or two might want to forgo some deductions. "Make sure you can show as much income as possible," he says.
- Larger down payments. An old-fashioned 20 percent down is very persuasive.
- Excellent credit. A credit score of 720 or higher will give self-employed borrowers some choices.
- Patience. Even for well-off business owners, qualifying for a mortgage is "not that smooth, easy no-brainer like it used to be," Savitt says. "If you want it to be quick, you’re paying a higher price."
Source: USA Today, Sandra Block (10/02/07)
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