Business owner Mortgage documents / Qualification

Hello,

For a business owner to qualify for a mortgage, will a Quarterly payroll be good enough or is a monthly payroll required? -- Its a NEW S-corp (started Q1 2021) with same owner / employee scenario -- where owner is running a payroll for himself as an employee but running a quarterly payroll.

Please advise -- and would appreciate if the loan experts can suggest a list of needed documents as well as any pitfalls to look out for.

Thanks in Advance.

For self employed you need 2 years of filed tax returns to qualify for standard loans. I have nonQM lenders that can do it but expect rates to be 3+% more than traditional mortgages.

Cares said:

For self employed you need 2 years of filed tax returns to qualify for standard loans. I have nonQM lenders that can do it but expect rates to be 3+% more than traditional mortgages.

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Hi Cares, Thanks for the reply -- As the business is a new one and has no prior tax returns, will the payroll that he is running as an employee, let him qualify as a regular W-2 employee? by taking only his payroll numbers into consideration (not the business income) for loan qualification along with his wife's regular W-2 numbers ? -- His wife is on W-2.

Short answer is no.

If you own the company, you need 2 years full W2 and tax returns as well. Reason being you could easily pay yourself a high amount in Q1 and stop all payroll completely at year end.

Many newly self-employed people fall into this problem of not qualifying for a QM loan because a lack of sufficient income history. The same actually goes for a W2 employee if they do not have 2 years of work experience. Sometimes even if you do have 2 years total work experience but only a few months at a new job in a new field the underwriter might deem your income to be instable.

The only way I can help borrowers is to help them finance into a QM loan with looser guidelines but higher interest rates and then target to refinance into a QM loan once the income history is solid. Other lenders may be able to help you but I think it will be very few that don't adhere to the 2 year income history.

Does your income history restart if you change roles at the same company?  For example going from W-2 employee to equity partner

fatduck said:

Does your income history restart if you change roles at the same company?  For example going from W-2 employee to equity partner

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That is kind of technical that I would have to double check the underwriting guidelines. And it definitely matters if you have 25% or more equity in the company or if you are related to the owner of the company. The requirements change.

Large law firm in my case, so very small equity %. Basically just switching from W2 paycheck to quarterly draw. Thinking about buying something next year but not sure if the uneven income will be an issue.

fatduck said:

Large law firm in my case, so very small equity %. Basically just switching from W2 paycheck to quarterly draw. Thinking about buying something next year but not sure if the uneven income will be an issue.

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I'll find out for your situation. So you'll be getting a K1 of significantly more or close to the same as your W2?

Cares said:

fatduck said:

Large law firm in my case, so very small equity %. Basically just switching from W2 paycheck to quarterly draw. Thinking about buying something next year but not sure if the uneven income will be an issue.

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I'll find out for your situation. So you'll be getting a K1 of significantly more or close to the same as your W2?

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Yep, significantly more on an annual basis, but most likely skewed heavily towards the end of the calendar year. Might have fairly limited income year to date at the time I'd be applying for loans. I haven't checked w/ the firm but I assume they could provide some kind of annual estimate or historical profit data.

They can count your first year income but if it's skewed towards the back half then you might have to wait until the end of the following year. Depends what the income amount is versus your DTI.

Cares said:

They can count your first year income but if it's skewed towards the back half then you might have to wait until the end of the following year. Depends what the income amount is versus your DTI.

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Thanks for checking, I guess that makes sense. Do they only care about what year the income is received vs earned? I could potentially defer payment of this year's annual bonus to Jan 2022.

fatduck said:

Cares said:

They can count your first year income but if it's skewed towards the back half then you might have to wait until the end of the following year. Depends what the income amount is versus your DTI.

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Thanks for checking, I guess that makes sense. Do they only care about what year the income is received vs earned? I could potentially defer payment of this year's annual bonus to Jan 2022.

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Bonus is treated separately as well and needs to show consistency across multiple years to count it. You're getting into all the gray areas of income qualification that is sort of dependent on the underwriter's determination.