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September 2, 2009
How Can Self-Employed Refinance?
I'm almost afraid to unleash chum into the water by asking, but with a recent post about refinancing, I have a general concern about freelancers and mortgages.
I have two properties and have over 20% equity in both of them. I've also been self-employed (S-corp) for almost 10 years.
Each year, my accountant has (legally) done his magic to reduce my taxable income via the expenses involved investment property and my small production company.
I truly feel like since I left corporate America and went on my own, I have no idea how much I make...of course the company has a gross, but between the S-corp flow through, the expenses as deductions etc...I just focus on the fact that the bills are paid, there's food on the table and I can travel and save a bit, because the AGI is so low.
But all that flies in the face of qualifying for a refi.
So, how can the (growing) legion of freelancers refi in this climate? Do you really have to take the hit on taxable income one year to qualify?
Comments
This may or may not be relevant. I am self-employed and got a mortgage in 2007 using a mortgage broker, who asked an independent accountant to verify my income. Basically, that meant providing her my 1040 and schedule C (which, like yours, states that I live darn close to the poverty line after deductions) and come up with a different number.
The number she came up with is a lot closer to reality than my 1040, less than 10% inflated if I go by my monthly budget and savings plan. But I don't know how she came up with this number, or how kosher this is now that it's not 2007 anymore.
Posted by: vanburenproud at September 2, 2009 6:39 PM
The answer is obvious - Cheat on your taxes, be prepared to accept the downside of those actions.
Posted by: newsouthsloper at September 2, 2009 9:14 PM
I recently purchased a condo in Carroll Gardens and had the same problem. I managed to get my mortgage through Wall Street Mortgage Brokers. The broker's name is Robert Yusupov. I don't have the phone number handy but I am sure you can look them up.
Posted by: SteamMan at September 3, 2009 9:01 AM
BKRed--I too am self employed with an S-corp and own a small production company. And I too never can figure out exactly how much money I make per year (much to my wife's dismay). I don't need to refi right now but I certainly would have the same issues if I did. Don't really know what to say except that I can relate to your situation.
Posted by: wasder at September 3, 2009 10:04 AM
I am in the same situation. I resent being told I am a tax cheat. Self-employed people have to take care of many, many taxes and costs that are subsidized and invisible for people who work for employers.
Posted by: WonTon at September 3, 2009 10:44 AM
I've had an S-Corp for nearly 15 years and know very accurately how much I make. I pay taxes in NYC, NYS, Los Angeles and Cal, and do quarterly updates with my accountants.
All the bank is interested in is your previous two years of 1040's. That number is the same as the Officer's Salary on your 1120S. For all purposes, that is the bottom line. If you've made that figure too low, then you're seeing the consequences.
I've done two refi's over the past five years, and have had no questions regarding returns.
Obviously, it's easy to pay for nearly your entire life through the Corp, but if you don't know how much you make, how could you possibly defend yourself in an audit?
Posted by: buttermilk channel at September 3, 2009 11:04 AM
Wonton - I dont make tax code, but it is pretty clear if you make 100K and only report 50K, you are a tax cheat. I'm sorry if you feel over burdened by higher tax rates and regs, but that is the law. Talk to your congressman if you feel over-taxed, thats what I do. If you want to only pay tax on 50K and then whine because you want a bank to base its decisions on how much you "really" make, you deserve the grief that goes along with your windfall.
And speaking of all of those taxes you take care of that employees dont, what about all of the benefits and finacial assitance self-employed people qualify for because they show low income. I have a neighbor that just got a low-income subsidized apartment because she "shows" $35K even though she makes over $90K.
Posted by: newsouthsloper at September 3, 2009 12:17 PM
The response about taxes and "cheating" is exactly why I was concerned about posting this question. Anyone who is traditionally employed (W2 annually from one employer) really isn't able to comment on the financial management for freelancers/self-employed. The compliance is much more complicated, and the deductions are greater.
Buttermilk Channel, thanks for your input. It's my guess that you are enjoying the benefits of a healthy, profitable bi-coastal career and perhaps despite being self-employed, still show a comfortable personal income. Hopefully, I'm right behind you! And I've got all my receipts/statements to defend myself in an audit, although I hope it never happens! (No one needs that stress!)
As I mentioned originally, I am very aware of how much my company makes, but the flow through to me personally after the expenses for the company and the rental apartments I have are calculated is what creates what feels like a "grey area" because I'm definitely not living my life on the income that flows through to the personal. (And it's not an extravagant life...)
I will say that being in the media/entertainment industry, I take legit expenses that someone in other fields wouldn't be able to, but it's not insane. In my experience, a solid, low 6-figure income that flows through the company creates a personal income that doesn't qualify for much given the still-insane figures that we contend with as NYC homeowners, especially with the newly constrained calculations being done by banks. (In most cases, wisely, but in some cases, they're overcompensating.)
Anyway, the general sentiment of my initial post was certainly about specific advice, but also to speak to what I think is a mushrooming issue as more and more people in a growing scope of fields are being turned out and turned into the "self-employed." I believe this is an issue that's going to need attention. I guess I'll wait and see what happens. Luckily, I have a window, but I do feel a bit penalized as I'm shut out of today's rates. (I think this is also because the banks are overwhelmed with averting foreclosures, which I am luckily not dealing with...)
Posted by: BKRed at September 3, 2009 1:56 PM
I was a freelancer for ten years. You don't have to cheat on your taxes to have this problem.
Freelancers and staff both pay about the same in taxes but it's calculated differently. In any case, the freelancers take a lot of deductions that staff don't. So the income number appears considerably lower than the equivalent staff salary. In my experience, the lenders take this into consideration somewhat, but not entirely.
Posted by: mopar at September 3, 2009 5:48 PM
newsouthsloper, all income must be reported. But that is not the number the lender looks at. They look at income minus expenses.
Posted by: mopar at September 3, 2009 5:53 PM
It's too easy to call freelancers tax cheats when they are merely following the tax code. I certainly don't cheat. If you are truly making it, or have a wage-earning job, then you just don't understand how the tax code works in this situation and this income bracket.
To the OP: any good mortgage broker is going to understand this situation. I used Mark Maimon at Universal Mortgage, he was good about this, but he also sprang a surprise on me at the closing table, so I don't exactly recommend.
Posted by: vanburenproud at September 3, 2009 6:00 PM
Mopar - I am a CPA, I understand there are 2 ways to "Cheat", 1. Under report income, 2. over report expenses/deductions.
To the OP - I am aware of the "Legal" magic your accountant works (See 1 & 2 Above) Reporting personal expenses as business expenses (or claiming nonexistent expenses)is very common way to do this. The result is the same - Your taxable income is reduced so your lax liability is reduced.
I dont really mean to come off as a jerk, I just have a theoretical problem with people who want to have their cake and eat it too. I just think it is a hypocrisy that needs to be pointed out.
Posted by: newsouthsloper at September 3, 2009 6:40 PM
Newsouthsloper, since you are a CPA, you must understand how this works even better than I do (not being sarcastic). I reported all my income and took almost no deductions. (For example, no meals, no trips.) Yet still there was quite a difference in the two lines of income. When all was said and done, I ended up paying about the same percentage of my income in taxes as I did when I was on staff. Maybe you can explain.
Posted by: mopar at September 3, 2009 11:37 PM
To OP:
I know my first post may have sounded like I am the business I mentioned. But I am not. I am the owner of a mechanical contracting company based here in Brooklyn. I went through hell to try to get into the apartment I now reside at. I was told by one mortgage broker he could get me a loan for 8% ! Sovereign Bank, where I had my personal accounts at the time told me they wouldn't even talk to me. TD Bank where I have my business account could only get me $130k. That might buy me a closet in a basement in Bed-Stuy (and who would want to buy there anyway?).
I found the company I mentioned in my first post and they got me into the apartment. It took A LOT of work on their part but they made it happen at 5.125%. Not too shabby...
Good luck and don't give up.
-SteamMan
Posted by: SteamMan at September 3, 2009 11:59 PM
Thank you SteamMan!!! I'll keep trying. Hopefully foreclosures will level out and someone will return my calls!
I also had terrible experiences with the banks that hold my personal and business accounts, not to mention the actual current mortgages. I guess one in the hand is not worth two in the bush to them!
Posted by: BKRed at September 4, 2009 5:20 PM
Vanburenproud, if you are still reading, could you kindly email me at moparbrownstoner at gmail? I have a fairly urgent question to ask you about the plumbing problem you found in your house. Thanks so much.
Posted by: mopar at September 6, 2009 12:53 PM
Guys you are completely right. My story is similar. I started refi with broker Alex Uskach from New Times Capital Corp five month ago and at the end he was able to screw everything so badly that bank declined to continue the case further. One more comment. Brokers now don't want to do a thing for the client. Old times gone when they were willing to help and stand for the client in front of Bank. Right now they are happy that Banks are still working with them, so don't trust anything, better go with the Bank directly.
Posted by: GWagen at September 7, 2009 12:29 PM
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