How to Qualify for higher loan amount as a business owner?

Question

Hey guys,

So I own my own business, and last year I purchased my first home and investment property (a duplex). It was a little tricky getting a loan as I own my own business and I pay myself periodically, about $100k/ year total. I think because there wasn't a consistent income, the underwriters didn't loan me much, ended up getting $300k which isn't much for southern california.

I've done much better this year, earned over $300k this past year, so I setup payroll to pay myself $100k as a consistent salary. Plus I can claim earned income from the business.

The drawback of paying myself a salary is that I can't write that income off and will pay more taxes, but will it be worth it when I get preapproved for a loan?

I guess my question really is, for a guy in my position, what is the best thing to do to get more loans? Ideally looking to buy deals for around $500 - $600k

Thanks in advance!

Reid Chauvin · Answer

@Kevin King - the lender and their underwriting team can only consider the net income in your tax returns. This does make it difficult for people who write everything off, as they don't technically have any income. You obviously need to look out for what's in your best interest, so I wouldn't necessarily advise not writing anything off, but instead consider what other sources of income you have.

You can use the income from your investment properties (assuming they more than cover your mortgages and expenses). You can also use 75% of the projected rental income for a prospective property to help offset the mortgage you're applying for.

Assets can also be used to supplement your income. If you have a solid amount of money over and above what you need for down payment and reserves, that amount divided by 36 (3 years) can be used to supplement your income as well. I've had a few instances where we've used a self-employed borrower's retirement accounts as their income.

If you have a lot of debts (credit cards with balances, student loans, car loans, etc), just know that those are reducing your capacity for a larger loan.

I would recommend finding and working with a lender who is willing to take the time to go through all of this with you so that you understand how much net income you truly need from your taxes, BEFORE you make any decisions about how you prepare your taxes.

Brad Sneckner · Answer

Hey @Kevin King, it sounds like you're incorporated, is that correct? This sounds like a lender that isn't particularly adept with self-employed borrowers, to be honest. You don't need "consistent" income throughout the year. I have clients that basically just pay themselves 100% via their K-1 and that is the income we use to qualify them. We just divide it by 12 months (or 24 if we're doing a two-year average of two K-1s) and then move on. We don't see whether those K-1 distributions were monthly, quarterly, or even once per year as a single lump sum. We just see the total, and it's not a problem.

There may be other particulars in your scenario that change the answer but I don't see why it would be a problem. Paying yourself a salary is not necessary, although it does sometimes make the calculations a little more favorable.

Let me know if you have any questions about positioning yourself well for the next property.

Peter Mckernan · Answer

@Kevin King I do the same on paying myself and the business doing more than the W2 I pay myself through the business (just a heads up I have another w2 income as well). The way we do it is the lender qualifies on the business income cause you can pull drafts and also pay yourself through the business as pass through. The lender should be a direct lender or portfolio lender that is not pigeonholed into only a few loan products to put you into a position that cannot get you approved on what you are looking for on the loan. They are out there and you can get approved for more.

Brad Sneckner · Answer

@Kevin King That can be a reality, but usually everyone is looking for/at the same things. If you're working with a banking institution, then they might be only offering you "portfolio products," meaning it's their own loan product and they determine all the details, guidelines, and requirements for their own loan program.

However, the vast majority of mortgage lenders are either a direct lender (like me) or a broker. And while they have ACCESS to some portfolio products, the majority of what we are working with are standard guidelines from Fannie Mae, Freddie Mac, FHA, or VA. And those guidelines are the same for every lender in the country if they are going to sell that loan to the respective agency (this is probably 90% of all originated mortgage loans in the country). So Complicated answer simplified, MOST of the time lenders have the same guidelines/requirements as every other lender, and it's just a matter of how knowledgeable and "plugged in" the specific loan officer is.

Hope this helps. And yes, I am in SoCal as well!

Reid Chauvin · Answer

You should be able to consider that $2,777 as monthly income, as long as it's in an account that doesn't penalize you for distributions.

The 75% is multiplied by the gross. The gross is determined by the appraiser and is based on market rents.

My company does offer this service, and this is what I do on a daily basis. This is part of the upfront underwriting that every loan officer should be doing when pre-qualifying their client. I'm not personally licensed in California, just AL, GA, LA, MD, TN, TX, and VA. I have colleagues who are, but I'm sure there is also a lender on this forum operating in CA who is willing to go through this type analysis with you as well.

Gary Wendorf · Answer

@Kevin King in Denver there is a loan company using banking statements rather than end of year tax filing.

Call SCL mortgage i believe. Possibly this type exists in your market?

Bruce Woodruff · Answer

Varied depending on circumstances, which change constantly.

For instance: you see a house you have to have....refi one you already own with B.S. loan. Later, sell one you own and pay off that loan. Repeat.

Kevin King · Answer

Hey @Bruce Woodruff

That makes more sense lol. You would refi to a FHA or Conventional after a year or 2?

Just curious, why wouldn't you get an FHA or conventional loan in the first place?

Sorry for the novice questions!

Bruce Woodruff · Answer

I meant Refi something, not cash..... :-)

Kevin King · Answer

Hey @Bruce Woodruff

I don't think I'll be paying off any 500k mortgages in a year or 2 lol.

How to Qualify for higher loan amount as a business owner?

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