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I am selling my home with about 430k equity. Want to buy another, and will need about 200k. I'm self employed fico score overs  750 is this some thing anyone can help with?
asked 6 days ago in General Financing by Mike

1 Answer

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Good morning, Mike. With a FICO score that good, and assuming that the $200k you intend to put down on the next home is a significant down payment (that is, you're not trying to buy a $2 million home with 10 percent down), I don't see a problem getting approved.....unless one or more of the following applies:

1. Your other bills are so high that your debt-to-income ratios exceed lender guidelines. If, for instance, you earn $10,000 a month, but your new housing costs (including property taxes and insurance) come to $3,500 a month, your car loans cost $800 a month, and your credit card minimum payments equal $700 a month, you're spending $5,000 a month -- half of your income. Before taxes and living expenses like food, gas, utilities, etc. That's a 50 percent debt-to-income (DTI) ratio, and for most lenders, that's too high.

2. You're not calculating your self-employment income the same way your lender does. Here's a (very) simplified calculation:

You might say that you make $10,000 a month, because that's what your business deposits are, and that's your gross income. However, when you do your taxes, you deduct your office supplies, depreciate your equipment, deduct your rent and any other services like office cleaning, and maybe even that company meeting in Hawaii or your business lunches.

Mortgage underwriters go to the bottom line -- the taxable income on your return. Then they add back depreciation (because you don't actually pay money when your assets depreciate -- it's just a paper loss) to get your income for mortgage underwriting purposes. If you have a lot of deductions, this figure will be considerably less than what you might consider your income.

3. The third item that could cause problems with a self-employed mortgage application is the length of your self-employment, and the stability of your income. In general, you must have been self-employed for at least two years. There are exceptions if you're getting paid to do the same services that you performed as an employee -- for instance, if you were employed as an accountant for your company and then switched to being an accounting consultant for your company, getting a 1099 instead of a w-2 but essentially doing the same work.

You must also demonstrate that your self-employment is stable and reliable. When you provide your most recent two tax returns, lenders will take a conservative approach to calculating your income. If your income increased from one year to the next, lenders average your taxable income to get a monthly figure. If your income dropped from one year to the next, lenders use the lower year's income, and may even cut that if there is reason to believe that your industry or company is not healthy.

However, some businesses regularly run in cycles -- for instance, I had a client who developed real estate tracts. In the beginning, when he was buying land, preparing sites and building homes, there were big fat tax losses. Then, the houses would sell and there would be lots of lovely income. If he applied for a mortgage in the "wrong" year, underwriters would kill him on the income calculations.

I helped get him a loan by bringing in five years of tax returns, demonstrating that the cycle he was in was normal, and a letter from his CPA stating the same thing, and offering the opinion that the business was healthy. We even included his contractors board license showing no disciplinary issues and his "A" rating from the Better Business Bureau. Sometimes you have to get a little creative. But unless there is a problem you did not bring up in your question, I see no problems getting a loan with what you're bringing to the table.

Good luck and thank you for writing.
answered 2 days ago by GinaPogol (22,130 points)
edited 2 days ago by GinaPogol

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