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Updated over 12 years ago, 03/05/2012
Pay myself Salary will help qualify for 30 year loans? Advice please
Hello, my question involves having my company paying me a salary. Would it be smart to do this since if I can show two years income, then I can qualify for 30 year loans on rental properties I am planning on owning. The main goal is to qualify for 30 year conventional loans to purchase rentals, but I am not sure how to do this being a business owner. Please advise. Thanks much.
If you own the company can't you just use your company tax returns to show your positive cash flow. I dont see why you would have to place yourself on payroll to qualify for a loan if you are a sole member of the entity.
If you pay yourself a salary, wouldn't you then have to pay income tax and ss/medicare on money you've already paid taxes on?
Originally posted by Mike G.:
But if you don't pay a salary, then you end up paying this in self-employment tax anyway. They'll always get your money!
If your company is organized as an LLC or an s-corporation, then any income earned just passes through to the owners of the LLC anyway. So, any LLC income will end up on your (and any partner's) personal tax returns, and will impact your personal income.
If your business is incorporated as a c-corporation, then you don't necessary have to take the income as salary, but don't get to claim it on your personal return. Though you can indicate the ownership on your balance sheet, and any retained earnings will show up as an asset.
So as business owner's we are still able to qualify for 30 year fixed loans?
For this kind of loan, the GSEs use the Mortgage Guaranty Insurance Corporation (MGIC) Underwriting Guide which has eligibility standards for property and borrowers. Note that youir company can't get the loan (section 4.01b 'Partnerships and corporations' says "Loans to general partnerships, corporations, limited partnerships and limited liability companies are not eligible...") but you can generally deed out of the (I assume) LLC and deed in with personal guarantee, possibly with help from your closing attorney. If you are self employed, you can possibly be eligible. See section 4.07 "Qualifying income" under Self-employment.
Originally posted by Chris Calabrese:
Right, sorry. I was assuming that he meant using money he already had to pay himself a salary and thus show "income", not that he would use money he would earn to pay himself.
Originally posted by Greg P.:
Self-employed persons can certainly qualify for loans, though you'll be asked for the previous two years of personal tax returns and business tax returns to substantiate your income.
Originally posted by J Scott:
Self-employed persons can certainly qualify for loans, though you'll be asked for the previous two years of personal tax returns and business tax returns to substantiate your income.
It takes two years of self-employment income to get lending. Isn't employment history required for w-2 employment typically shorter than 2 yrs? By setting yourself up as an employee of your LLC, could this make you look lendable to a bank much sooner?
Originally posted by Matt Jankowski:
Originally posted by J Scott:
Self-employed persons can certainly qualify for loans, though you'll be asked for the previous two years of personal tax returns and business tax returns to substantiate your income.
It takes two years of self-employment income to get lending. Isn't employment history required for w-2 employment typically shorter than 2 yrs? By setting yourself up as an employee of your LLC, could this make you look lendable to a bank much sooner?
Your LLC would need to be elected to be taxed as a corporation (C or S) for you to be able to issue yourself a w2 salary. A partnership or a traditional LLC structure typically does not allow equity partners to also be treated as employees. Check with your CPA and attorney, but I'm pretty sure this is the case.
As far as the bank requirements, I'm not sure if a W2 from yourself from a business that hasn't been open for more than two years is going to matter. You're probably going to have to wait for the two year mark no matter which way you slice it.
Originally posted by Greg P.:
If you can find a lender who will do a 30 year loan on a rental property, please share!
Daniel, Regions Bank completed one for me in December. They are currently working on a LOC against two of my properties, so I can get cash out to purchase more. The original was a 30 loan from them on a new rental property I was purchasing though, not a LOC.
I have also been approved for loans like this from Wells Fargo, though Regions had the better rate, so I used them instead.
It stated right in the paperwork that the mortgage was for purchase of an investment property.
