With all the changes going on around us, small business owners will not want to miss these important updates on mortgages in 2020!
Join us as we welcome guest Eric Leigh, VP of Mortgage Lending on our Facebook Live show.
Jennifer (00:01):
Hello, and welcome to Spark Accounting Solutions’s show. I’m Jenny Q, I’m the host, and I’m here with the founder of Spark Accounting Solutions. She’s also a CPA, CFC. Oh, I’m going to just, you have so many designations, uh, maybe some of the most important ones are you’re a profit first professional and a QuickBooks ProAdvisor, and you coach small business owners, how to actually make money versus earn revenue, which is really important. So welcome, Julie.
Julie (00:32):
Hey, thank you. Welcome. Yeah. Bringing home and getting money in your pocket is often more important than generating revenues. So writing strategies, people think they have to always make more revenue and finding strategies to make more profit with the revenue you’ve got is a great way to, uh, to boost your pockets. So that’s good. And we’re going to talk about something really important today. Um, for small business owners, self-employed people on paying themselves that has to do with buying a home in 2020, and we have a special guest today. Do you want to introduce him? Yeah. We’ve got Eric Lee today from guaranteed rate. I’ve known Eric for years. He is a great mortgage guy that can get the job done. And he’s also really great at explaining what people need to know. So I thought who better to talk to our small business owners, but you know what it takes to get a loan right now, then Eric. So welcome Eric.
Eric (01:32):
Good morning ladies. And thanks so much for having me on the show. I really appreciate that.
Jennifer (01:37):
Well, it’s really great to have you and I, as someone who self-employed myself, I cannot wait to hear the information that you have for us. Julie, why don’t you, uh, kick it off with, um, what might be the most important change that’s happened in 2020?
Julie (01:53):
Okay. So the first thing we wanted Eric to bring us up to speed on was what has changed with self-employed underwriting since, since COVID a lot of people have not, you know, gotten a loan recently, but it’s summer it’s home shopping time and what do they need to know and be ready for before they get in there.
1. What has changed with self-employed mortgage underwriting since COVID?
Eric (02:15):
Yeah. Yeah. Um, maybe the shortest kind of joke answer is what hasn’t changed since COVID with regard to self employed income and underwriting. Um, Julie, it’s a great question. And thanks for asking leading off with that, because that’s the one thing that I’m finding, um, more difficult now than it, any time in my career and that spans the great recession.
Julie (02:38):
Wow.
Eric (02:39):
Having the ability to get self-employed borrowers of mortgage has changed so dramatically from pre COVID to now. And there’s just so many things that I want to get into. And I apologize if that becomes a little bit of a long answer and please feel free to jump in if you want to redirect or something. I say kind of goes to another question, but let, let’s start off with how it used to be like back in the world before COVID hit us. So if you’re a self employed borrower, one of the first things that we have to see as a mortgage lender is that you’ve been in business for two years, not necessarily having filed tax returns for two years, although that is truly your paycheck, uh, for most self-employed borrowers, but being able to document that you’ve been in business for two years.
Eric (03:24):
So that hasn’t changed. What we used to have to do is we would take the last two years of your tax returns and we would do an income analysis from that. So I love how you led off the show here on, you know, top line revenue. I mean, that’s great. Every business has to have top line revenue, but what we’re more concerned with in the mortgage side of things is bottom line profit. Because really the shortest answer that I like to give people is your income for qualifying for the mortgage is what you pay taxes on. And that’s not necessarily the best and most complete answer, but it’s the easiest answer to give people because I can’t tell you the number of times I have somebody come and say, well, I made $80,000 last year. And I look at their schedule C or their tax returns on the top line.
Eric (04:08):
And certainly there’s $82,000 there, but at the bottom, there’s a number that starts with a negative. And so that becomes a different set of underwriting rules for how we look at somebody like that. But I think back to back to the answer, it’s a two year average of their income. There is a few exceptions to that. If you’ve been in business for more than five years, there are programs that allow us to do just a one year look at tax returns to figure out your income. But I like to tell people two years because it covers every self-employed borrower that way. Then what we also have to do, and this is not new, is we would have to get a profit and loss statement that that can be simple as something as simple as printing off a page from their QuickBooks that you help your customers with.
Eric (04:51):
And it’s just a profit and loss and a balance sheet through like, if we were doing that right now, I would do it for the second quarter. So we get that in. It’s not an audited thing. It’s just simply of a way to look at what’s happened year to date and compare that to what happened last year. What is new now because of COVID is we have to do a cashflow analysis on their business bank statements. And by that, I mean, we get their business bank statements that shows deposits, which are ideally revenue deposits from whatever widget they sell or service they provide or whatever the deal is. And we use that to offset with expenses that come out of there. And if that test doesn’t match to the profit and loss statement, doesn’t match to the tax return analysis. We’re going to have a problem in underwriting because here’s the thing COVID is not, uh, Oh, it started on March 19th or whenever the state shut down.
Eric (05:42):
And it ended whenever I was able to go back to business, not, not even close. This is being looked at by Fannie Freddie VA, all of the agencies as an ongoing event, because as we’re seeing right now with some of the rises in cases across the country in different hotspot areas, a business that was shut down for two months and allowed to reopen may be forced to shut down tomorrow or a week or a month from now. So this is not a look and say, okay, I was closed for a little bit. Now I’m back in business and everything’s hunky Dory going forward. It is not being looked at like that. This is being looked at as an ongoing event. And we’ll be continuing to look at that as an ongoing event until something massive changes and that’s going to be a vaccine. So there’s a lot of things that people need to be aware of, but that business cashflow analysis is the most important thing. And Julie, you can take a lot of different questions from that answer, but I’ll leave it at that and see where we want to go with that next.
Julie (06:34):
So I have a question for you on when, as you’re doing that, how much time has that added to the underwriting process for you guys?
Eric (06:42):
Yeah, uh, thankfully with my company and I can’t speak for other companies, it really hasn’t added that much time. I mean, honestly for me, it’s about 10 or 15 minutes because we have a desk that literally is specializing in income analysis for self-employed borrowers. So now we have documents that we have to assemble and it’s potentially gonna take more time for our customers to get those items together. But let’s just say I have all of the items on the checklist, right. And I have those all assembled and I send those up to a desk. They’re going to get back to me within 24 to 48 hours, just depending on their volume and what their turn times are looking like with the income analysis done. So pre approving a self employed borrower on my schedule. Doesn’t take me much more time, but it just depends on how long that support desk is behind at that point. So
Jennifer (07:31):
Gotcha. I’m curious, what’s the biggest mistake that you’re seeing come through the doors from people who are self employed.
Eric (07:41):
Okay. Great question. Oftentimes, and I’ll just use an example, let’s say, and we’re in Idaho right now. So Cincy is a huge thing around here. I mean, I don’t know how many rear windows you see in cars that say they’re a sensory independent consultant. There’s a, there’s a bunch of them, right? And so people that have a sole proprietorship, so a typical, simple schedule C that they put inside of their personal return. The biggest mistake that I’m seeing made is them running all of their deposits, personal and business and expenses, personal and business through one checking account. Because what we have to do in that situation is we have to go back in and have them show us which expenses are related to the business and which revenues are related to the business. And if they make a mistake like, Oh, I forgot that $120 charge on, on July 19th was a business expense. We’re going to assume that it’s a business expense if they don’t otherwise let us know because that’s their business account. So right now more than any time, I think the onus is really, really on the bar on the, on the business owner to create separate accounts and funnel all of their business activity through that business account. So it makes for a simpler analysis inside of the underwriting. So, and a lot of people just don’t do that because it’s just not as easy to do.
Julie (09:00):
Yeah. And that’s a great tip for, we encourage business owners to do that anyway. And then if it makes your lending easier as well, that’s a win, win,
Eric (09:09):
Especially now with the new rules and the, and the requirements that we have to do that income analysis, because that didn’t use to be the case back in February that only came about because of COVID.
Jennifer (09:20):
So speaking of, because of COVID, and this is probably a question for both of you with, on different sides of the, of the fence. If you have a self employed business owner who comes in and they haven’t been paying themselves regularly, or they haven’t been documenting it correctly. Or they are having any of the accounting issues that we’ve talked about in previous shows. How do they get move forward with getting financing? Do they have to fix what they’ve been doing or does the clock start over for them right now to start doing it? And then basically we’re looking at either one to two years, depending on their situation, Eric, for them to come in and qualify.
Eric (09:58):
So I just want to make sure I’m answering the question you’re asking, are we talking about wages that are self employed business owner pays themselves?
Jennifer (10:06):
Yes. And the way that they also track their, the way that they’ve been keeping their books. So it might actually be two questions,
Eric (10:13):
Right? Well, I’ll go to the wages paid to themselves question first, because that’s never a requirement for underwriting. I mean, there’s truly two different types of underwriting. That two types of income streams that we look at from self-employed borrowers, there’s what we call the pass through income, which if they have a separate tax return that they file for their business, maybe it’s an escorp or whatever structure they have that income from that tax return will pass through in a way to their personal return. And there is income there that we take from a variety of sources. It’s the tax return analysis. It’s the K-1, um, inside of the K-1. What percentage of ownership do they have inside of the business? Um, there’s different requirements depending on the percentage of ownership, but if they just start paying themselves, like, let’s just say they started in 2020, I’m gonna pay myself a wage for, you know, whatever. I need to show a history of that before I can use that. I can’t just say, Oh, yep. Now you’ve got to wait so that you started paying yourself. I can use that for underwriting, that, that doesn’t work in this environment may have worked with certain investors before, but not in this environment. Um, take me back to the other question again, to make sure. Cause I think I lost my train of thought on the second part of that, Jennifer.
Jennifer (11:22):
Uh, I may have lost my train of thought as well.
Julie (11:27):
I think you were talking about kind of what happens that they haven’t really been keeping their books up to date. Exactly. What can they do? Well, my answer to that would be get a bookkeeper and an accountant in place so that you can get your stuff organized enough so that you can go into Eric and say, look, I had income, or I didn’t have income. And even if you’ve been commingling, get the information, and get somebody to help you straighten it out. So you can actually show the path to your mortgage lender. So that makes sense to underwriting.
Eric (11:57):
Right. And that’s the thing that the pandemic has been such a massive disruption inside of the economy. I think that when you think about how bad this has affected our economy, and there’s something like 30 million continuing unemployment claims happening weekly, right now, you, you have to recognize what percentage of the workforce that is. It’s somewhere along the lines of 19 to 20%. Now that’s not the same as the unemployment rate, but that’s a different number inside of it that reflects all of those continuing claims, meaning they have initially filed last week and now they are filing again this week. So 30 million Americans, I mean, that’s a huge, huge number of people when, when you’re wanting to get your numbers in order, and you’re wanting to get that stuff in order, you have to have that dialed in more now because of how much of an impact that’s been. So I can’t stress this enough to your viewers right now, having that, having that bookkeeping dialed in, in a way that is, it makes sense. It has to make sense to an underwriter. And so if you’re haphazard about the way you track expenses or how you report things, or it’s inconsistent from 18 to 19 is returns. It’s going to create more problems than underwriting now because of what this has done to the economy than at any time in the past, even to the great recession I would argue.
Jennifer (13:13):
Wow. Okay. All right. Julie, do you have anything else to add to that?
Julie (13:17):
Um, no, I do not.
Jennifer (13:19):
Okay. This is why business owners like me are so grateful for experts like you, because it is so confusing, but you’re breaking it down really well. So let’s move on. Uh, if we’re, if we’re complete there, Eric on the table. Okay.
Eric (13:34):
I’ll just add one thing. I don’t want to make it sound like it’s absolute doom and gloom for small borrowers either. Please don’t think that’s the case. However, it is going to be much tougher for you to be able to qualify for a mortgage now than even back in January or February. If you don’t have your proverbial bookkeeping ducks in a row. So this gal Julie, right here, she can help you. I’ve known her for a while. She can take care of you and get those things in order. So little plug for you, Julie. I know you do a great job with that.
Julie (14:02):
Thank you. Thanks for that.
Jennifer (14:04):
Alright, Julie, let’s, let’s go on.
Julie (14:07):
Okay. Let’s go to number two, which is how is the fed impacting mortgage rates right now? Everybody’s excited about interest rates still, you know, but how, how is that actually working in the background to impact what rates we’re seeing right now?
2. How is the Fed impacting mortgage rates right now?
Eric (14:22):
Right, right. Great question. The thing that a lot of people and probably a lot of your viewers don’t realize and recognize is the fact that there’s two different types of stimulus that’s happening right now to bring us out of the COVID fog. I call it the COVID fog. There’s two types of stimulus. The one that most of reviewers probably hear about is the fiscal stimulus coming from current Congress. So the payroll protection act, um, the $1,200 checks being mailed out the expanded and additional benefits. Those are authorized by Congress. Those grab all the headlines, those grab all the news, because that really is directly dollar from Congress to dollar in people’s pockets. But to your question, what the federal reserve is doing, and most people don’t realize the federal reserve is purchasing mortgage backed securities. And to give you a really early short definition about what that is, I’ll equate it to purchasing a stock.
Eric (15:16):
Let’s say that somebody thinks Amazon is the greatest company in the world. And they think that this company is going to grow indefinitely forever, which who knows, maybe it will, the way that they’re going and you want to buy Amazon stock. You can go onto your Ameritrade account. Robinhood’s the latest rage right now. And you can purchase shares of Amazon and even sometimes partial shares of Amazon, right? Invest in that company. Think about a mortgage is the same kind of an idea. When you purchase a mortgage backed security or through a mutual fund in your 401k or whatever other variety of methods you purchase, mortgage backed securities, you are purchasing the ability to gain interest and returns from bundles of mortgages that are insured on the backside by Fannie Mae and Freddie Mac. Okay. The demand for that, those mortgage backed securities or the lack thereof is what drives interest rates on mortgages higher or lower.
Eric (16:12):
And without getting into the weeds on that, I just want that to be a simple explanation for your viewers, the demand for mortgage backed securities as an investment, or the lack of demand for those is what drives mortgage rates up or down. So back to the federal reserve, they are purchasing mortgage backed securities right now at a clip of about $20 billion per week. And they have committed to doing that through at least 2022. Now that’s subject to change. But as of right now, and you can tune in to the federal reserves, uh, they’re meeting actually this week, Tuesday and Wednesday, and they’re, post-meeting, um, a news release that they’re going to have on Wednesday. They’re going to come out and more than likely say the exact same thing, what they learned from the past. So go back to 2008, 2009, when literally the housing market rolled over because of all the stuff that happened, they have committed to not letting that happen again.
Eric (17:05):
So $20 billion a week into that’s now up to about $2 trillion, they are purchasing mortgage backs, securities to stimulate demand for those to keep rates lower. That’s the same single biggest reason that interest rates are at all time lows right now. And I literally mean that all time lows since federal Freddie Mac started tracking interest rates back in 1971. So the federal reserve has our back. And I mean, literally they have our back in the housing industry, like no other time in history. So I fully expect for mortgage rates to be volatile and bumpy going forward, but on a longer basis, I expect them to re remain low for longer because inflation is not an issue right now. The fed has continued to purchase mortgage backed securities, and we’ll commit to purchasing them until we get out of the COVID fog.
Julie (17:57):
So what I’m hearing is, is interest rates are great. The government’s helping us. And it’s also a good time to think about possibly refinancing. If you’re in a higher rate mortgage
Eric (18:09):
Right now about 65% of the volume, not personally that I’m doing, but originators in aggregate in the country are doing 65% is refinances right now, there is so much equity in homes right now. And by equity. I mean, if you aggregate the amount of mortgages outstanding out of all the balances and compare it to what homes are worth, there’s something like, I can’t remember the last number. It’s over $20 trillion of home equity. That’s out there. Now that doesn’t necessarily mean we should rush out and cash out, refinance all of our equity by any means. But it just simply States that the position that homeowners are in to refinance is, is such a strong position right now. So again, everybody’s situation is different, whether or not it makes sense to refinance depends on a where you’re currently at in your loan. And most importantly, how long you’re going to be in that home, in, in the next mortgage where you’re financing. It, it’s an important question to ask, but there are a lot of people that are in great positions to refinance that they can check those boxes perfect
Julie (19:08):
And refinancing for small business owners. They’re jumping through the same hoops, right? As far as proving income and all of those things,
Eric (19:17):
Right. That there isn’t anything like there used to be back in 2006, seven and eight, those stated income loans, those no income loans, those no document loans. I mean, that stuff is just gone and it’s not coming back. So all of the same boxes have to be checked with regard to income, credit assets, et cetera.
Jennifer (19:39):
Okay, perfect. It’s probably better for all of us, if those aren’t coming back
Eric (19:44):
Understatement of the year. Yes. We don’t want to have any of that stuff. Come back again. It just makes no sense. Right.
Jennifer (19:50):
Perfect. Okay. Let’s go on to number three now of the five items that we’re going to talk about. This one really peaked my interest. So I can’t wait to hear what you have to say about this, Eric.
3. What do people need to know about guaranteed forbearances under the CARES Act?
Julie (20:03):
Okay. So number three, one of the things in the CARES act was this concept of guaranteed forbearance, right? What the heck is that? What does it mean? And how is it benefiting people right now?
Eric (20:13):
Right? I’ll start with something simple. And I hope everybody can always remember this. And not only remembered this, share this on main street with anyone, you know, for Barron’s does not equal forgiveness. I don’t, I’m gonna repeat that forbearance does not mean forgiveness. One of the absolute fumbles with how Congress put this out into the media. And again, I can’t play ball. I can’t blame politicians for being politicians. I get it. You know, their job is to get reelected, regardless of what else we want to talk about. That’s their job. So the way that the CARES Act was put out there was, Oh, anybody that has a mortgage that’s insured by Fannie Mae, Freddie Mac VA, automatic forbearance. You don’t have to make payments for a year. Actually. They said it. You don’t have to make payments for six months, if you are affected by COVID.
Eric (21:04):
And then you can have another 180 day extension, if you’re still affected by COVID, it almost came out as sounding like you can take 180 days off and not pay your mortgage because of how they wanted to spin that to the news and mass media. Again, my opinion to get reelected in the fall or whenever their next term’s coming up. That is not what forbearance is. So the simple definition for forbearance is a delay of payments that you’re otherwise obligated to make a delay of the payments. You will make no mistake. You will have to make all of the payments that you’re granted forbearance on. At some point in the future, whether it be after your forbearance period is up, which would be worst case scenario or the payments get back ended on to the end of the loan. And when you refinance out of that or sell your house, that balance of the forbearance payments will come due.
Eric (21:59):
You are not getting ahead at all by taking a forbearance. And I think that’s where the biggest mistake people made was it felt like it was, Oh, I can take 90 days off or I can take a hundred eighties off for making my payments. And although that may be true during the COVID crisis to get you through for month to month, where you are, you are furloughed or your company forced a 20% payroll cut on you just to get us through that. You may have thought, Hey, I need to take advantage of that because my budget doesn’t balance more. I get it. That’s why that was put in there. But please don’t confuse that with forgiveness, meaning that you will not have to make those payments. So I’ll start with there and then come back to see if there’s any other questions about this guaranteed forgiveness. Cause I’m really glad you asked that question.
Julie (22:42):
No, that’s a great point because I’ve heard several people that, you know, as you’re online, you hear the horror stories and I’ve seen several people, not necessarily in one of the government programs, but just working with their regular lenders that had their payment under a forbearance for a few months. And then at the end of that forbearance, they had to pay all of those back back payments and haven’t been able to, and so really making sure people understand the terms of what they’re being offered as they’re looking at these forbearance programs as well,
Eric (23:14):
Right? And, and we’re past the window now where this was granted by the CARES act. But one thing that a lot of people didn’t realize, and I was on social media, Facebook lives, I think it had three of them trying to make sure this point got out there. If you recently did a loan. So let me just paint the picture here. Let’s say it’s February. And you see that rates are tricking, trickling down because loan originators, like I are out there saying, Hey, rates are moving lower. It’s time to do this. And somebody refinances with me, they start in February and they close. Let’s just say they close March 10th. COVID still not a thing yet. But they close in March 10th. Everything feels great, right? My first payment’s not due. Tell me first. And then wham, COVID hits you in the third week of March. Your businesses shut down. You’re furloughed, your payroll’s cut, whatever happens, happens. And then your mortgage servicer comes out and says, you know, forbearance is an option. You hear it in the news. You hear all of these things
Eric (24:07):
Because you have what would be in that,
Eric (24:09):
situation that perfect storm of events with what’s called a first payment, default, your loan then becomes ineligible for purchase by Fannie Mae or Freddie Mac. And because that first payment default happened and now Fannie Mae or Freddie Mac will not purchase your loan. That comes back to the originating loan company. And now, you know what, because that loan is not guaranteed by Fannie or Freddie because you did a first payment default, you are not afforded any protection under the CARES Act, because your loan is not insured by Fannie Mae or Freddie Mac or something like that. And there are a lot of people that got caught in that and are having to figure out how to catch up 90 days of payments now, because they’re not protected by the CARES act. It’s a point that too many people miss because of the way that that was fumbled. So it’s important for people to realize for, forbearance not forgiveness and you will get hurt if your loan is not insured by Fannie or Freddie or one of the government agencies. That’s good information. Yeah. It went in to help pay your mortgage and let something else go like your home. It’s your home. And again, everybody’s situation is different. I hate to say it just blanket like that, but you have to protect your home. So
Jennifer (25:20):
Great rule of thumb. When in doubt, pay your mortgage,
Eric (25:22):
Take your mortgage before everything else, you have to live somewhere. Right, Robin. Right. We could even meet something that we just don’t want to eat for awhile. We can get through it, but you need a place to live. So, yeah.
Jennifer (25:34):
Yeah. All right. So I feel like we touched on number four a little bit, but I suspect you’ve got even more information. So Julie,
Julie (25:41):
okay. Number four is how has COVID affected mortgage availability?
4. How has COVID affected mortgage availability
Eric (25:47):
Right. Right. I would say that it depends on the size of the loan and depends on the area of the country that you’re in. So I’ll, I’ll, I’ll use two different buckets here to answer that question, Julie, we’ll talk about what we call conforming loans. And we’ll talk about what we call nonconforming loans or sometimes called jumbo loans. Please understand that those are both considered conventional loans. So conventional loans, meaning, you know, 30 year fixed that aren’t FHA, aren’t, you know, VA for military personnel or veterans, things like that. We’re talking about conventional loans, but the amount of the loan is the key there. So I live in Idaho, in Boise. Most of my businesses done in Idaho or Washington or Oregon, but depending on where you’re at, there is a different, we’ll call it a line in the sand for a conforming loan, meaning alone, that conforms to the guidelines for Fannie Mae and Freddie Mac.
Eric (26:39):
Okay. Now in Boise it’s 510,000 and change. I can’t remember actually what the exact number is. I’ll just say it’s 500, $10,000. So any loans that are at, or under that amount conform to Fannie Mae and Freddie Mac guidelines, those saw relatively, I don’t want to say no impact, but comparatively very little impact and underwriting sans, the self employed borrower requirements that we covered earlier in the show, because that’s been a big, big change, but for somebody who’s a wage earner, an employee of a company that otherwise wasn’t dramatically effected by COVID. We haven’t really seen any, any harder ability to qualify them for mortgages. Now let’s go to the other bucket, the nonconforming, or in Boise, the loans that are above that line in the sand, huge dropoff for a while during the COVID fog. And we’re not out of the COVID fog yet, we’re starting to see a lot of these jumbo programs come back into the fold.
Eric (27:37):
But boy, back when this was hitting us hard, that almost dried up overnight. In fact, I can tell you stories from other originator, friends of mine, not, not colleagues at guaranteed rate per say, but colleagues of mine, especially down the Southern California area, which is where my business coaches located, programs just disappeared. Literally borrowers who were approved final approval and ready to go to docs and the investor who was going to do that loan. Nope, we’re not doing it. We’re cutting that off because of all of the impact of COVID was putting onto that business model. And by that, I mean the ability for that loan to get sold and securitized on the backside, into a mortgage backed security that dried up almost overnight now that’s come back, but jumbo mortgages were absolutely hammered by this and are now only starting to come back out of the COVID fog. I like that term COVID fog, FYI.
Jennifer (28:27):
I like it too… A lot.
Julie (28:29):
Yeah. It fits. It’s very fitting right now.
Eric (28:32):
A little bit on those right now, but we’re still in it. So
Jennifer (28:35):
Yeah, on every level really. Right. Every area of life, it just fits so perfect. Um, Julie, do you have any clarifications for that?
Julie (28:45):
Um, no, it’s interesting. And I, it sounds like, like the, the markets with a lot more expensive houses were definitely, probably hit harder by that then than some of the lower cost of living areas.
Eric (28:57):
Right. But by the mortgage availability portion of that for sure now, it didn’t dry up completely. And the ultra strong borrowers, you know, the people that were putting 50% down on a $900,000 loan in, you know, Redwood City or Palo Alto, California, that they were still able to get loans. So let’s not make any mistake about it, but the people that were needing, you know, 20% or 10% down jumbo loans that got really, really difficult to do and almost impossible, I would say for those areas. You’re right.
Julie (29:27):
Okay. Very good. Very good.
Jennifer (29:30):
let’s bring us home, Julie.
Julie (29:34):
There’s a lot of questions sometimes around, certain situations. So I’m a schedule C person or I’m S Corp with a W2. How do the different types of business entity structures affect what documentation they need to actually get alone?
5. How does my entity type affect the documentation required? Do documentation requirements for a mortgage change based on whether I am filing as a sole proprietor on schedule C or as an S Corp Owner with a K-1 and a W-2?
Eric (29:52):
Very little actually. So I like to tell people we work in twos, so we need two months of bank statements. We need two years of tax returns. Okay. We need two years of your employment history. Like we talked about self-employed borrowers, how many years do you need to have before you get alone too? So we work in twos that really doesn’t differ from that Scentsy schedule C person to the person that is an S Corp with a separate tax return. It’s twos a the only time that that would be different. And I don’t want to say that this is a blanket rule. So viewers, please don’t take this as that. But if you have been in business for at least five years, self-employed, there are opportunities for me to take one year of tax returns and go that route versus needing the two years. But as far as your question, the simple answer, when we check the boxes about what do we need from a self employed borrower on those different types of business structures, nothing really different
Julie (30:47):
Now, does it matter? A lot of people, when they get big enough, we’ll switch from a schedule C on their 1040 to an S Corp, for example, does that matter when it comes to underwriting, as long as they’ve been kind of in the same business for those two years?
Eric (31:00):
Yeah. So I think a good way to illustrate that as somebody who, you know, like you just described, they, their business has grown up and now their tax advisor tax professional CPA is advising them. You know what it’s, it’s time to get out of that schedule C and get you over into a different structure, because that just makes more sense at that point, if somebody did that, let’s just say for 2019, and they were a schedule C in 2018 in a S-corp in 2019, that that’s fine. We’re going to do a different income analysis for the schedule C than we would for the S-Corp return. But we’re still going to average those two in results. It’s just different math in the analysis on those two, because there’s tempered tax returns in different structures there, but we would still take a two year average of those bottom line numbers, if you want to think about it like that.
Julie (31:50):
Okay. Very good. I’ll ask one more question kind of around that. That’s more of a tax planning question that things that people do. How do you guys handled underwriting, when somebody buys a bunch of machinery for their business and takes Accelerated depreciation on it, so they take one Section 179 depreciation and expense it on the year they purchase it to really bring their taxable income down. You guys, you guys kind of take that into account a little bit as you’re doing underwriting, correct?
Eric (32:22):
We, we do. Yeah. Um, everybody’s situation is different. That’s a common way. I like to start these answers. So everybody’s situation is different, but as a general rule, depreciation is what we call an add back. And the reason that we do that, that the best way to describe those kinds of expenses as they’re expenses, it’s not like you’re writing a check for depreciation, right? It’s not like you’re writing a check for business miles. There are things that you expense that don’t cost you any money. Right? So depreciation is a really good example of that. So when you have depreciation of assets and again, everybody’s, situation’s a little different, that’s typically an expense that we can add back in to the bottom line, net income, remember the line at the bottom that you pay taxes on. That’s usually something we can add back in to create a higher qualifying income, because again, it’s not a cash expense.
Eric (33:12):
So I hope that’s a simple and short answer for that. So you’re right. It’s definitely something we take into account. That’s great. Um, home office is another one. I’ll just throw that in there because it’s not like you’re paying rims for that, you know, 256 square foot corner of your one bedroom that you have your office set up on with one file cabinet. And that kind of a thing, right? If that’s an exclusive use of that corner of that one guest bedroom to work in, and you take a deduction for that, you’re not renting that from a commercial landlord somewhere, right. You’re not paying to rent that, lease that space. So that’s why we can add back in home office deductions. It’s a noncash expense.
Julie (33:50):
Okay, perfect. Perfect. I bet I’ve got one kind of last question that I get a lot, which is for people that are thinking about buying either a first home or a bigger home, and they’re self-employed how, how early should they come in and see you to kind of figure out when do they get pre-qualified? How much are they qualified for? What would their payments look like? When’s a good time. When’s a good time to do that.
Eric (34:16):
Right? Um, I’ll give you a couple of answers to that with a couple of different examples. Let’s just talk about a couple of perspective clients here. Let’s say that somebody has just become newly self-employed like literally January 1st, 2020 that’s day one in the business as a self employed borrower, I would love to see that person sometime in the fall or at the latest, like, you know, December of 2020. So that first full year that they’ve been in business, because what I want to do is I literally want to educate them about how underwriting is going to look at their income. Now, we talked about this earlier in the show, we look at two years of tax returns. That’s our first starting point. So if I can educate that newly self-employed borrower, who knows that they need to wait two years minimum to be in business before they can get a mortgage.
Eric (35:07):
I want to show them how an underwriter is going to look at their income, because that may, that may teach them that they may want to file their tax returns differently than they otherwise would. And I can’t advise people on how to file their tax returns. I’m not that person I’m not licensed to do that, right, but I’m an educator. I literally was a teacher for 10 years before I started this. And I feel like the best thing I can arm that person with is this is how your underwriter is going to look at your tax return. It’s a flow chart. It’s literally start here, add this back, add this back, subtract this, subtract that bottom line is your qualifying income. If you know what that flow looks like, you can go to your CPA and your business coach, and you can make some decisions about how you’re going to report that income to set up that two year average.
Eric (35:55):
Does that make sense? And again, I can’t tell people what they should do. I can only educate them on how the underwriter’s going to look at that. So, so one answer for a brand new person. Like I want to see them at the end of their first year in business. Um, I know in my industry, it always gets a little bit slower after black Friday and up until Christmas, right? And then I just go crazy in the spring. So that’s a great time for me to meet with people and just teach them about underwriting guidelines and how it affects them. So now let’s take a seasoned business owner. They’ve been in business for six, seven years. I want to see them as soon as possible because the mistake that they may make is, Oh, the last time I got that mortgage back in 2006 and piece of cake, right?
Eric (36:36):
I mean, it is a different world, far cry, different world from the last time they got their mortgage. So their last experience with getting a mortgage in 2006 is going to be way different than now. And arguably, let’s just say they got a loan in January of 2019. It is a different world now by far from there because of COVID. So somebody who’s been in business and knows that they want to purchase a home or refinance, I want to see them ASAP. And I want them to bring in two years of tax returns a year today, profit and loss statement. And let’s just take a look and do an income analysis right away, like right away. Don’t presume that because it was okay, last time it’s going to be okay. This time, even if your business has not been affected by COVID, it might be affected more because of how the guidelines make us underwrite because of COVID. So does that answer the question? Okay. Yes.
Jennifer (37:26):
That’s really, really, really great, really great question. Um, before we wrap up this show, I wanna, I want to let the viewers know that Julie has prepared, um, uh, business crisis and financial management plan that you can grab free. Uh, it’s in the comments it’s on your screen right now, how you can grab that and Eric, your information has been so, so useful. If someone wants to reach out directly to you, what’s the best way to find you.
Eric (37:53):
Sure. Yeah. I mean, I’m, I’m all over Facebook. You can find my landing page. I’m trying to think of the best way to do it. It’s rate.com/ericleigh. So rate R a T e.com forward slash my first and last name, which is Eric Leigh, E R I C L E I G H. So that’d be the best place for you to get in touch with me, or you can just call me directly on my cell phone area code (208) 880-0316.
Jennifer (38:24):
Perfect. And we’ll go ahead and update the description in this video with all of that contact info as well. Um, so yeah. Thank you for sharing your knowledge, Julie, what are your, what are your parting words for the show?
Julie (38:36):
I think my parting words is if you want to, if you want to buy a house, if you want to get refinanced, you got to do the work in advance to figure out, you know what you’re going to need for underwriting, get your books up to date and make sure you’re making good financial choices. It’s a crazy time right now. And, and Eric’s done a great job of explaining what the changes are. So get your ducks in a row if you want to do it and be prepared.
Eric (39:05):
Can I piggyback on that for one second? Because that’s really good advice, Julie. I always tell people this because it is something that a lot of people miss out on making more money, like having more income, getting a second job, little side hustle. There is nothing wrong with making more money, but you get more bang for your buck from a debt to income ratio perspective by paying off debt, eliminating monthly payments. So I can’t stress this enough. And if you understand division and how math works, it makes more sense. It’s debt to income, monthly debt payments divided by income. If you reduce that numerator, your debt to income ratio goes up much quicker than it does. If you increase that denominator again, go make more money, go have a second job, have more revenue. That’s great, but you are still better served by paying off debt and having less debt with regard to qualifying from just a simple math debt to income approach. So de-leveraging paying off debt. Obviously having some money in the bank is nice as well, but boy, having less debt helps so much more. I can’t even stress that enough.
Jennifer (40:10):
That’s a great tip. Really great tip. Awesome. Eric, thank you so much for sharing all of this information. Uh, it shows that you’re an educator. Yeah. So good. And Julie, again, thank you for sharing all your expertise and if anybody wants to get ahold of you, Julie, the best way to do that
Julie (40:28):
You’re probably on my Facebook page right now. So click the contact us button and reach out and we will get an appointment scheduled to talk.
Jennifer (40:38):
Perfect. Awesome. You guys, thank you so much. Have a great rest of the day. And if you have any questions, go ahead and leave them in the comments. We’ll make sure and circle back and get those answered.
Eric (40:48):
Thank you ladies. Appreciate it.
Jennifer (40:50):
Thank you.
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