Thursday, May 5, 2011 - Article by: Chris Gummerson - Commerce Home Mortgage -
I wanted to write this post to explain why some people who are self employed are finding difficulty obtaining a mortgage. Even a wage earner who writes off non reimbursed expenses can be affected. For a person who is self employed or a independent contractor, it is common to write off as much expenses as possible. When doing so, an underwriter will take the adjusted gross income for your qualifying income. Some people will have a negative or loss for income, which you will not be able to get financing. If you are looking to finance your home or purchase a home and you have write offs, take a simple test to see if you will have a problem obtaining financing. An underwriter will use your adjusted gross income (if self employed, adding back any depreciation and meals-entertainment). And they will take 45% of this amount. The 45% is your maximum debt to income ratio a lender will allow. Add up all your payments such as mortgage, tax, insurance, car payment, hoa dues, credit cards and other debt. Then divide this amount by the adjusted gross income on your tax returns. (if you have depreciation or meal-entertainment expenses, you can add these back in to you AGI) This ratio should be less than 45%. If not, you will have a hard time finding a lender or bank to finance you. CPA's regularly tell people, even wage earners, to take 2106 expenses. But they dont tell you of the hidden dangers. If you cant qualify given your expenses, consider revising your taxes on the next years return. The underwriter will average the expenses for 24 months. Example using a wage earner with 2106 expense, a borrower makes 50k a year and in 2009 took a 2106 expense of 11k and 6k in 2010. Total is 17k over 24 month = $708. So if the borrower makes $4,166 a month, then deduct the 2106 expense for a total usable income of $3,457. Then the Underwriter will use 45% of this number = $1,555 is the total amount of debt this person can afford. Given he makes $4,166 a month you would think he could afford more of a payment. I hope this helps prospecting buyers!!!
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