Turned Down for Mortgage Today

[wincrasher]

Been shopping for a new house for quite awhile. Found a great bargain over the weekend - brand new house, 3500 sq ft, brick, almost 1 acre lot - marked down from $429k to $349k - offered $335k with seller paying closing.

Anyways, they wanted a pre-qualification letter with the offer, so we did the submission.

I'm self-employed and haven't done my 2008 taxes yet. My 2007 taxes were as a W-2 employee, I made alot less and didn't have nearly the deductions I get now.

Currently, all my payments (mortgages, car payment, etc.) are about 15% of monthly gross income. Adding this new mortgage would bring me to 25% of gross income. So to qualify for this new mortgage, I need to immediately do my taxes and forgo quite a few deductions - paying 10's of thousands in taxes I shouldn't have to pay, to get to a target AGI for approval.

They told me the amount of down payment was not important. I was only going to pay 10% down - could have actually done less according to them. The only thing important was the calculation of payments no more than 45% of AGI. What I don't understand is that if you are a W-2 employee, the calculation is based on your gross instead of AGI?

So I guess I'm going to wait and pay off one car and one mortgage and try again in 6 months. Just as well, I'll have alot more money saved by then to pay down. Seems kinda BS to me that with my cash flow and high FICO, they'd let my business go, but I understand their caution due to the excesses of the past few years. BTW, the rate was 4.85 for 30 yrs fixed. I hope the bargains and low rates are still here in 6 months.

In this regard, being self employed kinda sucks.

[snafu]

Would you consider doing the paperwork for an Amended filing? Would it be more likely accepted if done by your business's accountant? Why take the double whammy of losing the desired house deal and forgoing tax deductions?

Rules are different in different jurisdictions, perhaps your realtor can help you work with another financial institution. The custom in this community is for buyers to get mortgage approval as a 1st step to confirm which price range to target their search.

[wincrasher]

Ammending my 2007 return would not yield enough to qualify.

I am my company's accountant. I'm also the CEO, vice president of HR, janitor, office manager, etc....

[mdcrim]

I think he the other poster was referring to filing now for 2008, taking the hit on your deductions, then amending your 2008 return after you are approved for the loan. It may be worth looking into if you love the house...

[EEinNJ]

The rules for self-employment income have always been stricter for a conforming mortgage. IIRC, you have to show several years of consistent earnings. Hiding your taxable income with expenses hurts you in this area, besides being cheating. If they really are valid expenses, well, you can't afford as much house as you think. No-doc and stated income mortgages was the solution.
One tip I remember from 10+ years ago, when I last had a car payment- they don't count that against your monthly debt if you have less than 10 months left to pay. That may help if it's still true.

[arthurb999]

since 2008 is over, why would you have to wait to get 2008 deductions?

[wincrasher]

"Hiding" and "Cheating" are pretty strong descriptions for legit expenses.

Case in point - I take a regular business trip. The mileage deduction is about $500 dollars for this trip. My out-of-pocket for the trip is about $50 in gas.

I take alot of these trips and it does add up. In the long run, the cost of the car, insurance, maintenance, etc, probably exceed this cost, but right now the true cost to me is $50.

Health insurance premiums is another - I can deduct this off the top. The w-2 types can't deduct this at all I think.

There are lots of items like this that you are entitled to take if self-employed.

[EEinNJ]

Both my wife and I have been self-employed at times, so I understand completely about the various deductions such as you describe. If there legit, it's no problem. I didn't mean to cast aspersions. If it's a real expense, though, it reduces your income towards a mortgage. Non out of pocket things like depreciation and business use of home help cut your net, but unfortunately also count against you. The IRS also tends to scrutinize these deductions, too. Anyway, good luck getting a mortgage, I've been turned down a few times myself.

[wincrasher]

Update:

Increased my downpayment to 20% and all the "issues" went away.

So I'm a go on buying the house.

Funny how getting information out of these mortgage brokers is like pulling teeth. Every time you talk with them it's something different.

[Ima saver]

Congratultions on the new house!!

[simpleyme]

we have always used a bank,not a mortgage broker

the mortgage brokers we tried to deal with were not straight forward(used car salesman comes to mind)

the banks were pretty straight forward with their offers

[creditcardfree]

Congrats! I'm glad a little cash lured them in your direction.

[Hot dog]

Congrats! So did you get that interest rate of 4.85? Is that with points? It seems like a great rate

[wincrasher]

Trying to lock in the rate today - 4.875

No points per se, but the broker fee is 1% - so it's the same - banks here are typically charging 1 point.

[Russell]

That's a great rate! I want to refi our 5.875% mortgage but according to bank rate no one's offering anything in the 4.xyz% range. If I go with 5.25% the refi cost won't be worth the trouble.