Financing - Unconventional?

Question

Here's my situation. I'm seeking a mortgage on a duplex. I'm self employed. I have a seasonal lawn care business. My plan is to actually get a job in the restaurant business (for the winter and temper hours during the lawn season) where the income would have a base wage of $11 plus tips. I may even Uber it up for some extra income. Problem is banks do not like tip income and also I have many expenses for the business so it doesn't show much profit, even though many of these assets (truck, commercial mower, etc) will be paid off over the next 1-3 years. I want to set a goal for myself, to save potentially 25k-30k. I live in a market where you can buy a duplex for 75k-95k in a decent area.

What are my options here? Do I need to stay at this new job for 2 years and bolster my lawn care income or is there a workaround, say unvconventional financing? Or maybe a larger down payment?

Chris Mason · Answer

Hi Tom,

I wouldn't say you are dead in the water, and without seeing your tax returns I can only speculate, but a few notes before you assume that you can't get a traditional mortgage... Find a local lender that works with a lot of self employed persons, get an opinion from them.

- We do not use gross income, or AGI, we do our own wonky calculations that typically (but not always) ends up being a number in the middle of those two. People who think they make their gross income are often overly optimistic, people who think we use their AGI (such as yourself) are often more cynical than they need to be and give up without even trying! To wit, one example...

- Real estate depreciation isn't the only thing that can be 'added back' to your income. That truck and commercial mower can also be depreciated (if your tax pro knows how) and then that truck or commercial mower depreciation can be 'added back' (if your mortgage pro knows how). So you get a tax goodie from the IRS, and a mortgage goodie when it comes time to calculate your income. Note for both you and the lurkers: If a mortgage application is in your future, then any time your tax pro gives you a choice between depreciating something or writing it off another way.... take the depreciation!

- Tip income can count too. You have to -- surprise surprise -- report it and pay taxes on it. There may be an amended 2016 tax return, as well as a more honest 2017 tax return, in your near future, wherein you report all your tip income, allowing the lender to take a 2 year average. What you've got to figure out if if this increased tax bill will be more or less than the higher payment over time on a mortgage at 7% or 9%.

- Income from sources that can't be used as mortgage-qualifying income can of course certainly be used as assets for additional down payment. If you have $20k from some "gig economy" side hustle that can't be used as income at $20k/12=$1,666/mo, it can still be used as an additional $20k down, meaning you need to borrow less, meaning you can take the same income that can be used further.... it takes less income to borrow $80k than it does to borrow $100k!

- Non-mortgage note on Uber: I have literally never seen someone actually do Uber for >2 years. Every single person I've encountered burns out quicker and we can derive no income from it. Or, alternatively, all the people who do in fact do Uber for >2 years apparently hate their lives so much that they don't want to buy a home, meaning I never meet them except as a passenger. :P

Chinmay J. · Answer

If you have a decent credit score and willing to put down a decent down payment, you should consider owner financing. It's a good method for people like you who are in self employed situation.

Chinmay J. · Answer

Since its owner financing, the terms are loose and not guided by DC bureaucrats.  I have seen owner financing with about 10-15% down, and if it's a Contract For Deed, you can get away with even owner down payment.

Contact a good Real Estate Attorney in your state to see how typically such contracts will be structured in your state.

This article is not for your state, but will give you an overall idea of what these things are..

Unconventional Financing

Tom Harvey · Answer

@Chinmay J. How much of a down payment is typically expected when the owner finances, in terms of percentage?

Christopher Phillips · Answer

@Tom Harvey

There are two things to consider:

If you are going to live in a home as a primary residence, then you would need to seek out lenders with experience working with small businesses and the self employed. Lenders will go by tax returns and they will want to see two or more years of steady income. So, mid term, it's about building a down payment and keeping the credit up.

If you are buying as an investment, then there are investment options available.

A duplex isn't a great option because living in one side will make it harder to cash flow. It will depend on the situation. A triplex to a four plex will likely cashflow if you live in one unit, but then you'll need a higher down payment and enough reserves. But, with an investment property, you can still look for things like owner financing or bringing in a partner.

Jeff Dulla · Answer

@Tom Harvey there are always options. It’s always a question of whether or not they are worth it.

Non-Prime loans are becoming more and more available but carry a much higher annual cost. They are also typically shorter termed - like 5/1 and 7/1 ARMs. They also include points.

Do the financials even make sense on the multi unit with a 7%+ interest rate?

With conforming financing - yes, would would need two years if the new income in order to use it. Also tips would be used if you claim them. Your better bet is with the income from the business and adding back any depreciation expense you are claiming.

Financing - Unconventional?

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