How Can A Self-Employed Wholesaler Best Present Tax Returns to Qualify For a Personal Residence Loan?

Question

After wholesaling rental properties and being tired of being a tenant again myself - I would like to be able to qualify for a conventional loan. In speaking with a local tax attorney, I was told that 2013 was the last year I could use the Schedule D for form 1040 for short-term capital gains and that I would do better to file as an S corporation as I will now be considered a dealer for 2014. Filing as an S corp also helps with self-employment taxes.

I also spoke with a lender today that told me my taxable income would be averaged for the two years and that my total monthly payments including housing costs can be up to 43% of average monthly income. He also said I should take the down payment out of the business account a couple of months before applying to allow that sum to season and show that it isn't an essential amount to have in the business. I have also heard that stated income loans (liar loans as they were called) are making a comeback of sorts, but I suspect the downpayments required would be quite large.

I know that lenders categorically don't like investors due to the uneven cashflows, etc. I am a little reluctant to list my occupation as an investor. When I file as an S corp I could say I am the president of the corporaton - but either way the short term capital gains on real estate sales are evident on the Schedule D and form 8949 so I don't know if that really matters. I have been to enough seminars that say when  you are trying to get a business loan, to say you are anything other than an investor though.

How can I best present my tax returns to qualify for a conventional loan myself? Of course I would like to get some owner-carry deals but our market is so strong they rarely come along for me.

Burt L. · Answer

I appreciate the replies - certainly glad a I posted about the topic!

I will certainly re-examine whether I need to file an amended return, as there might be a conflict if I say I am in the business but only have capital gains; not sure if  a lender will accept capital gains as income instead of ordinary income. I was told that I wasn't over the somewhat vague line yet through 2013 for the amount of wholesales I had done to date. No question that sales in 2014 take me into the real estate dealer territory. In part I want to simply file by the deadline (just happens to be October 15) to avoid failure to file penalties, which would then be retroactive to April 15 and would be 25% plus interest since April 15 and would be a significant amount.

It sounds like I would be better off to pursue a loan with just the 2014 tax return as it will be stronger. I wasn't aware that one could go to the local IRS office and have their return stamped - I was certain I would have to wait 4-6 weeks for the return to be posted to my IRS account so a lender could confirm the return with the IRS using Form 4506T.

I would much like to avoid using the occupation of Investor and stating that I am a Real Estate Consultant would imply more regular cash flows. Until I am receiving a salary from my own S corp, I don't know that it matters, as the only cash flows are from the separately listed property sales that I receive a 1099S for each time, from the title company as I almost always double-close. The 1099S will at least be easy for an underwriter to tie-out with my bank deposits.

To be self-employed, it seems that one also has to wear another hat as a loan specialist; its almost enough to make one want to get a more traditional W-2 again, but not quite.

Hattie Dizmond · Answer

Yes...I was not suggesting a commercial loan.  The commercial loan officer can facilitate a conventional mortgage.  It happens all the time.  But, a commercial loan officer will be a much better advocate with the underwriters than a mortgage lender who isn't accustomed to dealing with the tax returns and financial statements of an investor.

Albert Bui · Answer

The last suggestion is if 2014 is looking smokin then Id recommend to file 2014 in early/late March or whenever the accounting/CPA software for the current filing becomes available and have the returns stamped at your local IRS office. You can then use this latest tax return to qualify with if you're income restricted with 2013 tax returns.

The advantage of the IRS stamp is that you'll be able to use the 2014 tax returns right away instead of waiting for the IRS to confirm your 2014 taxes in their system which generally takes 4-6 weeks which could delay your closing so spending 20-30 minutes at the local IRS office could save some major timing hurdles.

This applies to conventional, FHA, VA financing but I believe even portfolio lenders and commercial lenders pull 4506T's (tax transcripts) as well (varies not all).

Burt L. · Answer

This thread certainly contains valuable information for this self-employed loan seeker!

On the accounting side - yes- I double close each transaction and for better or worse I am in the chain of title but it makes the process go more smoothly without last minute issues.

I will look at whether to restructure my tax filing both for correct reporting and for what presents better to an underwriter. An underwriter may be more confused with an amended return though, as its not an entirely new return but just a form that identifies changes and provides an explanation for them. Underwriters likely don't have much experience with amended returns and it could actually hinder the process. There are also three years to amend to change the reporting format of the very same sale transactions and the loan process could be accomplished first. I would check with the underwriter first.

As to Good Faith Estimates, my experience also been that they don't mean much. I certainly do see the value in working with an experienced loan officer now; with a W-2 loan application I suppose the bar could be set much lower for a loan officers experience with self- employed persons and I could use a sharper pencil in evaluating loan costs.

Albert Bui · Answer

We will accept capital gains as income but as an accountant above mentioned, why do you have capital gains if you're a wholesaler? The only reason I can think of is if you actually purchased and took possession of the RE asset in the short term and actually sold it to the end investor (or double escrow/etc) then you'd have a short term net gain. No one can advise you based on a forum you'll need a loan officer who to help review your tax returns and where they are currently and what you'd like to qualify for then you can figure out how to restructure your filing to be more receptive to lenders.

If you want to avoid failure to pay penalties just file anyway then work out the payment details after the fact atleast you'll "net," save on the horrendous penalties that would have been levied. (experience, no tax advice)

1 year tax return & Stamp - experience can save you a lot of head aches and money or you can shop rate lenders to death and end up with a beautiful good faith estimate worthy of mental solace but, only to have the terms at the end come out completely different... =/

Salary from S-corpo - this does not matter income from Scorp whether salary or profit distribution is still viewed accumulatively as "self employment," income with respect to lending qualification. We would add both (scorp salary + profit) together and average over the applicable period 12 months or 24 months depending on the conventional product utilized.

Jay Hinrichs · Answer

@Hattie Dizmond

with the new safe act loans most commercial banks are precluded from doing any owner occ at all.. Like my little bank can do 6 in a year .. any more than that and they need the full nmls route and all the other Tila stuff... It used to be as you described though..

Albert Bui · Answer

Hi Hattie, Commercial portfolio loans tend to only be for business use or owner occupant businesses/commercial + multifamily. I think he wanted to go from tenant to primary residence or qualify for his first home unless I misunderstood?

Conventional financing can go as low as 5% down with 1 year self employment tax returns while commercial portfolio lenders generally want 20-30% down payment in my personal experience for non owner investments units/properties.

Albert Bui · Answer

HI Burt,

You made a few really good points:

- when you do list your occupation try real estate consultant or professional sounding title, any title that avoids from sounding like you have inconsistent income will definitely help

- the lender mentioned you should take the funds out couple months prior to the purchase should be rephrased to state you should take it out min 75 days prior and move it to your personal account. The reasoning is you cannot use "business funds," with out massive scrutiny so if you value your sanity you would make the business to personal checking transfer 75-90 days out so that the 2 most recent bank statements will show the funds situated in your "personal," account and therefore count as personal assets. The other concern is that if you use "business funds," - funds from a business operating account the underwriter will be required to do a cashflow analysis on your business (more reasons to reject your loan) so Id recommend the seasoning your funds route

- 43% Debt to Income is a conservative route for conventional financing, you should easily be able to go to 45% min and if you have 10-20% down with decent credit and 6-12 months reserves in your personal checking account post closing you should be able to go up to 50% on conventional, 56.99% FHA, and VA (if you're a veteran) skies the limit (ive seen up to 78% Debt to income).

- You'll need a letter of explanation (LOE) to explain to the underwriter (UW) that you incorporated your business recently (they dont understand why investors do this - go figure) and that it was recommended by your tax accountant. Your lender should be able to help explain that the cash flow is the same with or with out the corporation (only difference is Salary + profit split = save on SE taxes - not tax advice). The UW's always ask about this when the borrower incorporates (goes from Schedule C, or D to S corporation salary + profit split).

For your scenario, if you did better in 2013 and your 2014 profit and loss supports equal or better income in 2014 I would use 1 year tax return conventional financing if the purchase price/loan amount/fico scores/income/ down payment guidelines work for you.

The topic is very complex but in essence a 1 year tax return requirement is more streamlined (less documents less headache and qualification risk).

Hope that helped.

Steven Hamilton II · Answer

To answer your question.... The Correct way.

Steven Hamilton II · Answer

Looks like you should be amending your returns as wholesaling is active income and treated as self employment NOT capital gains.  You're going to owe self employment tax.

How Can A Self-Employed Wholesaler Best Present Tax Returns to Qualify For a Personal Residence Loan?

Most Popular Reply