Chris Salese

For many self-employed borrowers, there’s always a delicate balancing act in place when trying to qualify for a home loan.

Often times, without proper advanced planning, a self-employed borrower can see a significant reduction in their purchasing power if they’re running a large amount of expenses through their business.

Since your filed federal tax return is a major income validator for most lenders to use for qualification purposes, you typically only have one-time per year to get this right.

Therefore, meetings with your tax and mortgage professionals are essential for the best collective guidance.

However, as a self-employed borrower, running expenses through your business can also be beneficial for loan qualification as well. It’s your standard dual-edged sword.

For example, if you have a monthly obligation that appears on your personal credit report but it’s being paid by your business, this could help to lower your debt-to- income ratio on your home loan application.

As long as your lender is able to verify the obligation was actually paid out of company funds and the obligation was considered in the cash-flow analysis of your business, then the account payment may not need to be considered as part of your individual recurring monthly debt obligations.

In order to disregard this payment on your application, your lender usually follows a specific confirmation process.

The first step is to make sure the account in question doesn’t have a history of delinquency.

This means that your business would need to provide acceptable evidence that the obligation was paid out of your company funds for the most recent 12 months with cancelled checks or bank statements.

The second step is your lender’s successful cash-flow analysis of your business. This analysis must take the payment of the obligation into consideration.

If your business provides acceptable evidence of its payment of the obligation, but your lender’s cash-flow analysis of the business does not reflect any business expense related to the obligation, then that could be a problem.

Should there be no evidence of, let’s say, an interest expense or taxes or insurance and the expense isn’t equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on your credit report and the age of the loan itself, then your lender would have to count this debt against you.

Another major debt that might not need to be counted against you is a co-signed home loan.

If you co-sign for a home loan but you are not the party who is actually repaying the debt, then you have what’s called a contingent liability.

This liability doesn’t need to be considered as part of your future recurring monthly debt obligations if your lender can verify a history of documented payments on the co-signed debt by the other obligor.

Of course, there can’t be a history of delinquent payments for that debt and the other obligor should’ve been making payments on the debt for at least 12 months.

Chris Salese can be reached at chris@delsurmortgage.com or (707) 363-4439. He is a licensed California mortgage banker (NMLS 254469 /1850 CA BRE 01377933/01215943) and equal housing lender.

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