New business owners & the two years’ tax return issue.
Self-employed mortgages – The hardest loan I’ve ever closed was for a client who made more every year than any borrower I had met up until that point. I wasn’t surprised though. With self-employed borrowers, the uber-successful ones are usually as challenging as those that are struggling (those can be tricky too of course).
Even though the deals can be tough, I like working with business owners, and excel at finding ways to get deals done.
Who they are..
They say people will work 90 hours per week for themselves to avoid working 40 hours for someone else. There’s few things I admire more than the guy who leaves the safety net of a salaried job behind to go build something for himself and his family. The people that don’t want to build something for someone else – and just get by. The people that want to build something for themselves and their families – a legacy.
The guy I mentioned earlier owned a well-established business (and a semi-pro sports team). He grossed $2 million/year. He was buying a $700K home. Should be a slam dunk, right? Not quite. He had bought and sold businesses throughout the past few months, and had several entities of his own, passing income through to others that he also owned.
So what’s the problem?
The real problem is when I begin to analyze business tax returns, I’m hoping to see one thing – But the borrower’s CPA has a completely different goal. See, business owners usually know the overall temperature of their business at any given time, and know exactly how much money they’re making. At the end of the year though, their accountant takes over. A good accountant will use every resource possible to write off every expense and investment, to minimize the tax impact. As they should!
Most business owners are relatively hands off on this process, and are simply praying for a positive call from their CPA saying, “Great news! You only owe $XX.XX in taxes this year!” If that number is better than the self-employed borrower is expecting, they normally accept that with a smile, crack a beer, and don’t think anything more about it.
The new guys…
This usually presents the biggest challenge to new business owners. Obviously the first year someone starts a new business they generally have a lot of expenses. So once those get backed out of the money they did manage to make from scratch, there’s not much left showing on the tax return.
Most lenders will have to average two years’ of income. That means that even if the new business owner has a ground breaking year the following year, it will translate to roughly half what they made once the start-up year is averaged in. So as hard as they’ve worked to build their business, they’re set back another year.
How we help
There are certain deductions that can be added back because they are one-time losses, paper losses, etc. Not only do I search for these, but I also qualify the majority of my self-employed borrowers for a program that allows me to underwrite them and approve them using only the latest year’s tax return! Doing this, I don’t have to penalize self-employed borrowers for their start-up year.
Every scenario is different, and this isn’t an automatic solution for every borrower, but I’ve helped plenty of new business owners buy homes when other lenders have said, “no.” I utilize a mainstream loan product that has no increase in rate or fees for utilizing this flexibility. Why doesn’t every lender offer this? Some lenders simply won’t allow it from an underwriting/risk assessment standpoint. Sadly, many simply don’t know it’s an option.
So, if you’re a business owner, new or established, and want to speak with a mortgage lender that understands you, and how to help self-employed borrowers, let’s talk.