Wednesday, October 15, 2014

How Can A Self-Employed Wholesaler Best Present Tax Returns to Qualify For a Personal Residence Loan?

Over at Bigger Pockets we came cross the following discussion: How Can A Self-Employed Wholesaler Best Present Tax Returns to Qualify For a Personal Residence Loan?

Burt L.

Real Estate Investor from steamboat, Colorado

Oct 14, 08:29 PM

After wholesaling rental properties and being tired of being a tenant again myself - I would like to be able to qualify for a conventional loan. In speaking with a local tax attorney, I was told that 2013 was the last year I could use the Schedule D for form 1040 for short-term capital gains and that I would do better to file as an S corporation as I will now be considered a dealer for 2014. Filing as an S corp also helps with self-employment taxes.
I also spoke with a lender today that told me my taxable income would be averaged for the two years and that my total monthly payments including housing costs can be up to 43% of average monthly income. He also said I should take the down payment out of the business account a couple of months before applying to allow that sum to season and show that it isn't an essential amount to have in the business. I have also heard that stated income loans (liar loans as they were called) are making a comeback of sorts, but I suspect the downpayments required would be quite large.
I know that lenders categorically don't like investors due to the uneven cashflows, etc. I am a little reluctant to list my occupation as an investor. When I file as an S corp I could say I am the president of the corporaton - but either way the short term capital gains on real estate sales are evident on the Schedule D and form 8949 so I don't know if that really matters. I have been to enough seminars that say when  you are trying to get a business loan, to say you are anything other than an investor though.
How can I best present my tax returns to qualify for a conventional loan myself? Of course I would like to get some owner-carry deals but our market is so strong they rarely come along for me.


Wayne Brooks

West Palm Beach, Florida

Oct 14, 08:39 PM

Well, you've got to show ordinary income.  But more curious, you were reporting wholesaling/flipping income as short term cap gains?


Hattie Dizmond 

Real Estate Investor from Grapevine, Texas

Oct 14, 08:41 PM

I think the best single piece of advice I can give to you is to talk to some smaller, local lenders.  Look specifically for lenders who will be keeping your loan on their books and not selling them off in packages.  Talk to the commercial lender.  You don't have to get a commercial loan, but they will be much more understanding and comfortable with your tax returns.  Build that relationship.


Telephone: 980-322-5965
Hattie Dizmond hdizmond@yahoo.com 980-322-5965

Steven Hamilton II  Moderator

Real Estate Investor from Lake Villa, Illinois

Oct 14, 09:11 PM

Looks like you should be amending your returns as wholesaling is active income and treated as self employment NOT capital gains.  You're going to owe self employment tax.


Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: StevenHamilton@HamiltonTax.net
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660

Steven Hamilton II  Moderator

Real Estate Investor from Lake Villa, Illinois

Oct 14, 09:21 PM

To answer your question.... The Correct way.


Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: StevenHamilton@HamiltonTax.net
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660

Albert Bui

Real Estate Investor from Irvine, California

Oct 14, 09:43 PM

Originally posted by @Burt L.:
After wholesaling rental properties and being tired of being a tenant again myself - I would like to be able to qualify for a conventional loan. In speaking with a local tax attorney, I was told that 2013 was the last year I could use the Schedule D for form 1040 for short-term capital gains and that I would do better to file as an S corporation as I will now be considered a dealer for 2014. Filing as an S corp also helps with self-employment taxes.
I also spoke with a lender today that told me my taxable income would be averaged for the two years and that my total monthly payments including housing costs can be up to 43% of average monthly income. He also said I should take the down payment out of the business account a couple of months before applying to allow that sum to season and show that it isn't an essential amount to have in the business. I have also heard that stated income loans (liar loans as they were called) are making a comeback of sorts, but I suspect the downpayments required would be quite large.
I know that lenders categorically don't like investors due to the uneven cashflows, etc. I am a little reluctant to list my occupation as an investor. When I file as an S corp I could say I am the president of the corporaton - but either way the short term capital gains on real estate sales are evident on the Schedule D and form 8949 so I don't know if that really matters. I have been to enough seminars that say when  you are trying to get a business loan, to say you are anything other than an investor though.
How can I best present my tax returns to qualify for a conventional loan myself? Of course I would like to get some owner-carry deals but our market is so strong they rarely come along for me.
 HI Burt,
You made a few really good points:
- when you do list your occupation try real estate consultant or professional sounding title, any title that avoids from sounding like you have inconsistent income will definitely help
- the lender mentioned you should take the funds out couple months prior to the purchase should be rephrased to state you should take it out min 75 days prior and move it to your personal account. The reasoning is you cannot use "business funds," with out massive scrutiny so if you value your sanity you would make the business to personal checking transfer 75-90 days out so that the 2 most recent bank statements will show the funds situated in your "personal," account and therefore count as personal assets. The other concern is that if you use "business funds," - funds from a business operating account the underwriter will be required to do a cashflow analysis on your business (more reasons to reject your loan) so Id recommend the seasoning your funds route
- 43% Debt to Income is a conservative route for conventional financing, you should easily be able to go to 45% min and if you have 10-20% down with decent credit and 6-12 months reserves in your personal checking account post closing you should be able to go up to 50% on conventional, 56.99% FHA, and VA (if you're a veteran) skies the limit (ive seen up to 78% Debt to income).
- You'll need a letter of explanation (LOE) to explain to the underwriter (UW) that you incorporated your business recently (they dont understand why investors do this - go figure) and that it was recommended by your tax accountant. Your lender should be able to help explain that the cash flow is the same with or with out the corporation (only difference is Salary + profit split = save on SE taxes - not tax advice). The UW's always ask about this when the borrower incorporates (goes from Schedule C, or D to S corporation salary + profit split).
For your scenario, if you did better in 2013 and your 2014 profit and loss supports equal or better income in 2014 I would use 1 year tax return conventional financing if the purchase price/loan amount/fico scores/income/ down payment guidelines work for you.
The topic is very complex but in essence a 1 year tax return requirement is more streamlined (less documents less headache and qualification risk).
Hope that helped.


Albert Bui, New American Funding
E-Mail: albert@albertbui.com
Telephone: 949-514-5106
Mortgage Planner & Financial Strategist NMLS#345453 - CA, TX, WA

Albert Bui

Real Estate Investor from Irvine, California

Oct 14, 09:49 PM

Originally posted by @Hattie Dizmond:
I think the best single piece of advice I can give to you is to talk to some smaller, local lenders.  Look specifically for lenders who will be keeping your loan on their books and not selling them off in packages.  Talk to the commercial lender.  You don't have to get a commercial loan, but they will be much more understanding and comfortable with your tax returns.  Build that relationship.
 Hi Hattie, Commercial portfolio loans tend to only be for business use or owner occupant businesses/commercial + multifamily. I think he wanted to go from tenant to primary residence or qualify for his first home unless I misunderstood?
Conventional financing can go as low as 5% down with 1 year self employment tax returns while commercial portfolio lenders generally want 20-30% down payment in my personal experience for non owner investments units/properties.


Albert Bui, New American Funding
E-Mail: albert@albertbui.com
Telephone: 949-514-5106
Mortgage Planner & Financial Strategist NMLS#345453 - CA, TX, WA

Albert Bui

Real Estate Investor from Irvine, California

Oct 14, 09:52 PM

The last suggestion is if 2014 is looking smokin then Id recommend to file 2014 in early/late March or whenever the accounting/CPA software for the current filing becomes available and have the returns stamped at your local IRS office. You can then use this latest tax return to qualify with if you're income restricted with 2013 tax returns.
The advantage of the IRS stamp is that you'll be able to use the 2014 tax returns right away instead of waiting for the IRS to confirm your 2014 taxes in their system which generally takes 4-6 weeks which could delay your closing so spending 20-30 minutes at the local IRS office could save some major timing hurdles. 
This applies to conventional, FHA, VA financing but I believe even portfolio lenders and commercial lenders pull 4506T's (tax transcripts) as well (varies not all).


Albert Bui, New American Funding
E-Mail: albert@albertbui.com
Telephone: 949-514-5106
Mortgage Planner & Financial Strategist NMLS#345453 - CA, TX, WA

Hattie Dizmond 

Real Estate Investor from Grapevine, Texas

Oct 14, 10:02 PM
1 vote

Originally posted by @Albert Bui:
Originally posted by @Hattie Dizmond:
I think the best single piece of advice I can give to you is to talk to some smaller, local lenders.  Look specifically for lenders who will be keeping your loan on their books and not selling them off in packages.  Talk to the commercial lender.  You don't have to get a commercial loan, but they will be much more understanding and comfortable with your tax returns.  Build that relationship.
 Hi Hattie, Commercial portfolio loans tend to only be for business use or owner occupant businesses/commercial + multifamily. I think he wanted to go from tenant to primary residence or qualify for his first home unless I misunderstood?
Conventional financing can go as low as 5% down with 1 year self employment tax returns while commercial portfolio lenders generally want 20-30% down payment in my personal experience for non owner investments units/properties.
 Yes...I was not suggesting a commercial loan.  The commercial loan officer can facilitate a conventional mortgage.  It happens all the time.  But, a commercial loan officer will be a much better advocate with the underwriters than a mortgage lender who isn't accustomed to dealing with the tax returns and financial statements of an investor.


Telephone: 980-322-5965
Hattie Dizmond hdizmond@yahoo.com 980-322-5965

3 comments: