Maybe I’ll Just Go Out on My Own…

Economic times are tough.  There are layoffs and threatened branch closings, all sorts of unrest in the labor markets.  The “recovery” hasn’t shown up at your door yet, and you’re considering going to work with your brother and opening that new office selling the supercool widgets he makes.

It might be a great idea.  Can I offer one thing, as a lender in Utah (and the rules are the same everywhere), for you to think about before you go?

If you’re going to refinance or buy a house, do it before you leave your job – before you even mention to anyone that you’re thinking of doing so.  Underwriters are unkind to the self-employed (and even more unkind to those whose verifications of employment come back with “we don’t think he’s staying here very much longer”).  There are no more stated-income loans (well, essentially), so you’re going to have to document all your income, and not with bank statements, either.  It will be tax returns. And those will be verified by an IRS transcript.

You’re going to want to have a long chat with your accountant.  She’ll probably have some suggestions for ways that you can minimize your tax liability while maximizing your adjusted gross income (AGI), and you definitely want to do that.  Underwriting is going to look hard at your AGI, and there are also add-backs for depreciation and amortization, so you can get some tax relief there without hurting your qualifying income.

But the big thing is that if you are self-employed, you have to have two years of tax returns showing this before you can be qualified for a loan under FNMA/FHLMC (Fannie/Freddie) guidelines.  So it’s going to be at least 24 months, and possibly longer, before you’ll qualify, once you leave.  And don’t try to claim that you’re not self-employed just because you get a W2.  If you own more than 25% of the business, you’re self-employed no matter how you get paid.

I’m not saying you shouldn’t do it.  I love self-employment.  I’ve been self-employed for a decade.  Small businesses are the heartbeat of the economy.  But before you go, get your house in order.  Literally.

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