Self-Employed? Don't Assume You Don't Qualify!

 Happy Friday!

One of the questions consumers continue asking Google and AI is:

“I'm self-employed and take a lot of tax deductions. Can I still qualify to buy a home?”

The answer is often YES—but we need to look beyond the obvious.

I've worked with self-employed borrowers for more than 30 years, and one of the biggest misconceptions I encounter is that the income reported on a tax return tells the whole story.

It doesn't always.  And if it does, it can be complicated.

With conventional financing, we analyze the business income, expenses and cash flow. Certain noncash expenses, such as depreciation, may be added back when permitted by underwriting guidelines.  Also home office use, and a couple other items.

When conventional financing doesn't work, we may have other options:

• Bank-statement loans: Some programs use 12 or 24 months of personal or business deposits, adjusted for applicable expenses, rather than relying on tax-return income.

• Asset-based qualification: For buyers with substantial eligible assets, certain programs may allow us to use those assets to help establish qualifying income.  There are a variety of formulas that may be used.

• Non-QM financing: Alternative programs may include P&Ls or qualify based on rental income for an investment property.

Karen's Desk: The Tax Planning Conversation

Here's something I encourage self-employed clients to do: Talk to me before making major tax-planning decisions if purchasing or refinancing a home is on the horizon.

A perfectly legitimate tax strategy that minimizes taxable income may also reduce qualifying mortgage income.This is why collaberation with a Tax or legal professional is always encouraged.

I'm certainly not suggesting anyone pay more taxes than necessary! But coordinating with the borrower's tax adviser before the returns are filed can sometimes preserve more financing options.

Ask Karen

“My buyer has only been self-employed for one year. Should they wait another year before looking?”

Not necessarily!

Conventional guidelines generally look for a two-year history, but there are exceptions for borrowers with at least 12 months of documented self-employment and appropriate prior experience in the same field or occupation.

The important thing is to evaluate the entire situation before telling the buyer they need to wait.

Realtor Talking Point of the Week

When a prospective buyer says, “I'm self-employed, so I probably can't qualify,” try this:

“Don't rule yourself out! I work with a mortgage professional who specializes in self-employed borrowers. Let's have Karen look at your situation before we make assumptions.”

Sometimes the buyer needs a different loan program. Sometimes we need better documentation. And sometimes conventional financing works after all.

AI Prompt of the Week for Realtors

“Write a friendly, 150-word explanation for a self-employed prospective homebuyer who thinks they cannot qualify because of tax deductions. Explain that conventional and alternative mortgage programs evaluate income differently, avoid promising approval, and encourage a conversation with a mortgage professional experienced in self-employed financing.”

One Final Thought

A complicated tax return doesn't necessarily mean a complicated mortgage—or an impossible one.

If you have a self-employed buyer, I'd love to look at their situation early, before they get discouraged or decide to postpone their purchase.

Have a wonderful weekend!

Karen Card
Sr. Loan Officer | NMLS #235218
American Pacific Mortgage Corporation
714-290-6940
www.card-team.com

October — Fall Is Here…Even If Mortgage Rates Aren't Falling!

I haven't written much lately about travel and fun, but I've certainly managed to squeeze some in!

I recently spent four days in Bermuda Dunes celebrating a birthday at an amazing home complete with our own pickleball court, sand volleyball, ping pong and a swimming pool with a slide. Much fun was had playing pickleball and Mahjong!

Then it was off to San Diego to watch my grandchildren race their Sabots while their parents were off gallivanting around the world. San Diego Yacht Club is always a fun place to spend a weekend.

Next up is Cabo Pulmo for some scuba diving—one of our favorite dive destinations. We're hoping for lots of fish, maybe some sharks and, if we're really lucky, whale sharks! We'll finish in La Paz, staying at the marina while our friends from DPYC head out fishing. Hopefully they'll return with somthing good for dinner!

And now, back to real estate…

MORTGAGE RATES ARE OVER 7%. NOW WHAT?

Take it from me—the sky is not falling…but we sure wish interest rates would!

I've been in the mortgage business long enough to have seen just about every kind of market. Homes will continue to sell and buyers will continue to buy them. The numbers have changed, but that simply means we have to look at financing a little differently.

One option getting renewed attention is the Adjustable-Rate Mortgage, or ARM.

Before the Great Recession, ARMs were quite common. In fact, many of the loans I originated were 5-year ARMs. Why? Because many California homeowners didn't keep the same mortgage for decades. They moved, refinanced to access equity, or refinanced when better rates became available.

ARMs fell out of favor after the mortgage meltdown, along with many loan products that were considered risky. Today's ARMs, however, are not necessarily the same products borrowers may remember from that era.

With long-term fixed rates where they are today, ARMs are worth another look. They aren't as readily available as they once were, but I do have sources for them.

The important question isn't simply, “What's the lowest rate?” It's “Which loan structure makes the most sense for how long you expect to own the home and keep the mortgage?”

SELLER CREDITS — ONE OF MY FAVORITE STRATEGIES

One of my favorite moves is to have an offer accepted on a property and THEN, when appropriate, renegotiate the purchase price UP. Why on earth would we do that?

To generate a seller credit that can save the buyer a substantial amount of cash out of pocket.

For example, rather than purchasing a home for $1,000,000, we might restructure the transaction at $1,020,000 with a $20,000 seller credit toward allowable closing costs, prepaid expenses or a rate buydown. The seller's net can remain essentially the same, while the buyer gets $20,000 of real benefit toward the financing.

And here's something many buyers—and even some Realtors—don't realize: the appraisal does not necessarily have to come in at the increased purchase price.

The lender will base the loan on the applicable value under the loan program. If the buyer is making a large down payment, as one of my current clients is doing, there may be plenty of room for an appraisal below the contract price without changing the loan amount at all. With a smaller down payment, an appraisal below the contract price could require the buyer to bring some additional cash.

Of course, seller credits are subject to the limits and eligible uses of the particular loan program. That's why I like to get involved before the offer is structured—or immediately afterward.

Sometimes the best negotiation isn't getting the seller to lower the price. It's getting the seller to help solve the buyer's financing problem.

SELF-EMPLOYED? PLEASE TALK TO ME BEFORE YEAR-END!

If you're self-employed and think you may buy or refinance real estate next year, now is the time for us to talk—not after your tax returns have been filed.

Whenever possible, I like to review the financial picture with my self-employed clients before year-end and coordinate with their tax professional as appropriate. That gives us an opportunity to understand how their tax-return income may affect mortgage qualification before decisions become final.

And sometimes the answer isn't changing anything on the tax return at all.

We have a variety of financing options that may not require traditional tax-return income qualification, including bank-statement and other alternative-documentation programs.

The important part is pre-planning.

Please don't call me in April and say, “I just filed my taxes and now I'd like to buy a house.” 😊

Call me before year-end so we can look at the options first.

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FROM KAREN'S DESK — A REAL-LIFE SOLUTION

This month I worked with a client who wanted to pull cash out of a rental property to pay for remodeling and upgrades.

Both the rental and the client's primary residence were owned free and clear, so rather than automatically putting the new financing on the rental, we looked at the entire picture.

The better solution? A Home Equity Line of Credit (HELOC) on the primary residence, where we could obtain a lower rate than financing the investment property.

I also like using a line of credit for projects like this because remodeling expenses don't usually happen all at once. With a HELOC, the borrower can draw funds as the project progresses and pay interest only on the amount actually borrowed, subject to the terms of the line. Why borrow—and pay interest on—money you won't need for another six months?

Later, if it makes sense, we can evaluate converting or refinancing the outstanding balance into fixed-rate financing.

It's a good reminder that mortgage planning isn't just about finding a rate. It's about looking at the entire picture and finding the financing structure that works best for that particular client.

Should I ask for a Lower Home Price or a Seller Credit?

Happy Friday!

Every week I research the questions homeowners and buyers are asking Google and ChatGPT about home purchases, mortgages and the issues surrounding homeownership.

This week I want to turn that around and give you a question to ask me before you negotiate your next offer:

If the seller is willing to give $20,000, where should we put it?

Should a buyer negotiate $20,000 off the purchase price?

Or would they be better off keeping the price where it is and negotiating $20,000 toward their financing and closing costs?

The answer may surprise your buyer—and it definitely isn't the same for everyone.

A simple example

Suppose a buyer is purchasing an $800,000 home and the seller is willing to give up $20,000 to make the transaction happen.

Reducing the price to $780,000 sounds terrific. And depending upon the transaction, it may absolutely be the right choice.

But a $20,000 reduction in sales price doesn't translate into a $20,000 reduction in the loan. If the buyer is financing 80%, for example, the loan amount only decreases by about $16,000.

Depending upon the buyer's interest rate, that's likely a relatively modest reduction in the monthly principal-and-interest payment.

Now let's consider keeping the price at $800,000 and using some or all of that $20,000 as an allowable seller credit.

Depending on the loan program and the buyer's particular situation, that money could potentially help with:

• Closing costs and prepaid expenses
• Discount points for a permanent rate reduction
• A temporary interest-rate buydown
• Preserving some of the buyer's cash rather than using all of it at closing

Seller-paid financing concessions such as discount points and temporary buydowns are recognized under conventional guidelines, subject to applicable interested-party contribution limits and program requirements. 

The point isn't that the seller credit is always better. It isn't.

The point is that we should do the math before deciding how to negotiate the $20,000.

Karen's Desk

This is where I can really help before you write the offer or counteroffer.

Give me the purchase price, the amount the seller may be willing to concede and a little information about the buyer.

I can model the alternatives:

What happens if we reduce the price?
What happens if we use the money toward closing costs?
What happens if we use it toward the interest rate?
What happens if we structure a temporary buydown?
And which option leaves this particular buyer in the strongest position?

A few times I have had clients who were running short of cash to close.   Before the appraisal was performed, they went back to the seller and increased the price by the amount needed and then negotiated a seller credit FOR THE IDENTICAL AMOUNT--  which the buyer used toward all closing costs.  And, the proepty still appraised just fine, with the new higher purchase price.  The increase in the mnthly payment was minimal but it saved the deal.

Ask Karen

“Can we just ask for a huge seller credit and use whatever is left over?”

No. Seller contributions are subject to loan-program rules, and the allowable amount and permitted uses vary.

For example, FHA generally permits interested-party contributions up to 6% toward eligible borrower costs. HUD VA's rules are different: certain seller concessions are subject to a 4% limit, while some ordinary closing costs and discount points are treated differently under VA rules. Benefits Conventional financing has its own interested-party contribution requirements.

And importantly, a seller credit isn't simply cash the buyer gets to pocket at closing.

That's another reason to call me before putting the number into the contract.

Realtor Talking Point of the Week

When a seller is willing to negotiate, instead of automatically saying:

“Let's ask for another $20,000 off the price.”

Try:

“Before we decide how to use that $20,000, let's have Karen calculate which option gives you the greatest benefit. A price reduction, closing-cost credit or financing concession can affect your transaction very differently.”

That's a much more valuable conversation than simply negotiating price.

The takeaway

Don't just negotiate the price. Negotiate the transaction.

If you have a buyer getting ready to write an offer—or you're working a counter and there's money on the table—call me before you decide where to put it.

Sometimes a few minutes running the numbers can make that $20,000 work much harder for your buyer.

Have a wonderful weekend!

Karen Card
Sr. Loan Officer | NMLS #235218
The Card Team | American Pacific Mortgage
714-290-6940
www.card-team.com