I can claim almost no income but will I be able to get a loan?

Question

Hey Everybody!

I've been wrestling with this question for a bit. I have a small business (not real estate) and I have currently have 4 buy and holds, each with 30 yr conventionals on them. We've had two years with a LOT of startup expenses in the biz and I can legitimately claim very low income. For the past two years, on the advice of my lender, I didn't use the deductions so I made it look like I made 50k on my taxes so that I could get some mortgages.. Of course the problem with this is that I had no money and needed to pretend that I did, and then I went into debt paying taxes just so I could get the mortgages... I now have 4 mortgages with cash flowing properties and I have next to nothing in the bank with tax season upon me..... Should I do this again and pay another 10 grand in taxes this year just to pretend I'm making a lot? Is there another way to loans that doesn't rely so heavily on the income I show on my tax return??

John Woodrich · Answer

To start - the lender should not be offering you tax advice.  He could say that you need X amount of income to qualify for a loan but he shouldn't be helping you game the system.

Second, if you check the bottom of your 1040 you will see the following statement: Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year.

So you may be violating this statement but if you read it closely it lists that you have to accurately list all amounts and sources of INCOME.  Doesn't mention deductions.

From a practical standpoint, the IRS isn't ever going to care.  You could amend and claim refunds of erroneous prior taxes paid but if you filed with the intention of misleading your lender you are likely committing mortgage fraud.

As mentioned above, if you find good enough properties they should cancel out or improve your DTI ratio but the problem you may have is that your DTI is based off a fake income number.  Your DTI may be 80% and if that is the case that surely will prevent you from making future purchases...

Kevin Romines · Answer

@Mark Burik Yes, you can claim as much or as little as you have legitimate write offs for. This is very common with small businesses. It always a balancing act for them to write off as much as they can to keep from paying more taxes than they are required to, yet showing enough income to qualify for the loans that you will need. Anybody that tells you are doing something wrong doesn't understand taxes and small business income.

The alternative to conventional loans that require you to show enough income to debt ratio properly for the loan is a Non-QM loan. The Non-QM loan can do the loan without ever looking at or considering your income. On this loan, if the property is cash flowing enough to pay the mortgage payment, then you good to go. The drawback is that the interest rate will be higher however the down payment is about the same, 15-25%.

That said, most rental properties, if bought correctly will not add to a persons debt ratio. If done correctly, it will add to the persons income. So if it were me, I would still show enough income to debt ratio no more than 45-50% based on your current expenses counting your existing rental income. If you show enough income to do that, then at that point any additional rentals you buy can be bought using a Fannie Mae loan and will not add to you debt ratio assuming you bought them for the right price. You can have up to 10 financed properties before Fannie Mae in theory will cut you off. If you know the ways to structure things, you can have virtually unlimited financed properties and still get Fannie Mae loans. But that is a more advanced conversation for another time.

Russell Brazil · Answer

Yes.  In fact I also do not take all the deductions that I can claim, to maintain an income that makes it easier to borrow.

James W. · Answer

Sounds like mortgage fraud to me...  I suppose your lender ended up making some money on the deal which is why they recommended it.

Is your plan to refile your previous tax returns now that you have completed those loans to get the money back?

I wouldn't recommend what you are doing.

Naftali Schabes · Answer

wow, you got scammed.

refi them with a hard money lender

Mark Burik · Answer

Don't I have the option to legally NOT CLAIM things as business expenses?

Cara Lonsdale · Answer

Not taking all the deductions you can seems like a losing scenario.  I would stop doing that.

If you have 4 properties that all cash flow now, they should offset each of their debts to you.  For future purchases, you can use a hard money lender (who doesn't care about you, just the property) for the initial loan, and then refi once the property is rehabbed and/or rented out.  Once all the units are rented, and the property shows a profit, the lender can use this income to help you qualify for the refi.  It takes VERY LITTLE income to do it this way, but you ahve to be strategic about the properties that you select.  They can't be losses.  They have to be profitable so they can offset the debt they incur, and potentially offer cash flow that you can use to qualify.

Alternatively, if the property you are considering already has Tenants in place, you can work with a traditional lender because they can use the rental income.  You don't have to start with the hard money lender to acquire.

I can claim almost no income but will I be able to get a loan?

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