Dale was the picture of discouragement. He slumped in his chair across from me and seemed reluctant to meet my eyes. He had bought his small condo in Bellevue nearly ten years before. Now, it was worth much more, and he had enough equity to move up to a larger home. He earned a very good income, and his credit score was nearly perfect. There was only one small problem.
Dale was self-employed.
There was a time when getting a mortgage was easy—even for an entrepreneur like Dale. Lenders were willing to take the borrower’s word for how much money they made: “stated income” loans, requiring very little documentation.
Today, underwriters insist on documenting every penny of a borrower’s income. Many self-employed people take every advantage of legal business write-offs, and this has been a disaster for them. Dale had built a thriving business, distributing fluorescent novelty toothbrushes. He had spent years crisscrossing the state of Washington, visiting dentists and retail outlets, and passing out thousands of free fluorescent toothbrushes.
The hard work and many miles on his van were beginning to pay off. Now that his business was a success, he thought about selling his condo and moving up to a larger one. He did what many buyers do: he went to the bank where he kept his business and personal accounts.
His Personal Loan Consultant at the bank, a young man named Maurice with a very nice suit and a broad smile, asked him to fill out an application and provide his tax returns and bank statements. Dale did, and was disappointed when, a week later, Maurice called him with bad news.
“I’m sorry,” he said, “but you just don’t make enough money to qualify for a mortgage.” Dale was stunned. His business was very successful, and growing. He was showing a solid profit every month and he believed he had enough equity to make a good down payment. How could they possibly deny him?
Maurice adopted a sympathetic tone. “With all the write-offs you took last year, you just don’t show enough net income to qualify. I’m very sorry.” Dale hung up, discouraged.
Now he was in my office, looking as though I was his last hope. I looked at his tax returns. He was a sole proprietor, so he filed a Schedule C: Profit or Loss from Business. His top line, “Gross Receipts or Sales,” was healthy: more than $150,000. That was a lot of toothbrushes. Even after subtracting the wholesale cost of his merchandise, he had a nice gross profit.
Looking at the Expenses section, I saw that he had claimed Depreciation of $5,000 on business equipment. He also had $7,500 in lease payments on the van. These two items alone affected his income by more than $1,000 a month.
Checking his credit report, I saw an entry for a car lease at $625 a month. “Did you lease the car in your name?” I asked.
“Yeah,” he said, “but I pay it from the business account.” That was good news.
“Did the other loan officer analyze your Schedule C when he said you didn’t qualify?” I was pretty sure I knew the answer.
“I don’t think so,” he said. “He told me my net income was too low to qualify, and that was it.”
I put his credit report on the desk next to his tax return. “See this line here, your car lease?” I pointed to it on the credit report. “It’s on your personal credit report, but the business is paying. I can exclude that from your debt ratio, so it doesn’t get counted twice. And here’s another item.” I pointed to the $5,000 depreciation. “We can add that back to your net income as well.” Dale was leaning forward in his seat, following the numbers I was showing him. He looked hopeful.
I entered the address of his condo into our Home Valuation Report site. He had enough equity to make a 20% down payment on a much larger home. I calculated his mortgage payment and added taxes, homeowners insurance, and mortgage insurance. I entered the adjusted net income from his tax return. My calculator displayed the debt to income ratio. I smiled when I saw the number.
“Shouldn’t be a problem,” I told him. He looked incredulous.
“You mean, I got the loan?” he asked. “Just like that?”
“Not quite,” I told him. “We have a few little hoops to jump through; but I can tell you that your income is just fine for the loan you want. We just had to dig through your tax return to find it. It’s all about knowing where to look.”
Man, I love this job.