LOCAL RECORDS OFFICE – There has been growing demand for loan officers in the real estate market as of 2016. When people think of purchasing a home the last thing they think of are the loan officers. I was reading through an awesome article in the Los Angeles Times last month and thought of some additional and much more detailed things to consider when trying staying bankable. The article did a fantastic job giving us an overview of what to do to stay in a position to get loans. I want to share some additional items that your mortgage broker may forget to tell you before it is too late:
#1 – Where to Keep Your Reserve Funds
If you are unclear on what this is please visit “Local Records Office’s Blog” to read the article on staying bankable. It is becoming increasingly difficult to use business assets to qualify for reserve funds. Many lenders will require a CPA letter stating that it will not hurt the business to take the funds out or will not allow you to use them at all.
Beginning December 1, 2016 many loan offices will no longer accept CPA letters to use business assets to qualify for personal loans. This is going to make it next to impossible to use business assets so I recommend keeping enough reserves in personal accounts to qualify for your loans. If you choose not to do that you will want to move money from business accounts to personal accounts four months before you are expecting to do a loan. There are times that the underwriter will want to see up to three months of bank statements and you do not want to show the underwriter a large transfer on any of the statements they look at.
#2 – The County Records Will Be Updated
I just learned this one last month and it can be especially painful if you own rental properties and are trying to buy a primary home. The problem might come from the records on each of your rentals with the county. Both the title AND the mailing address are important. You need to have your mailing address different than the property or it could be a red flag to and underwriter. It is something you can get through but could create headaches so it is best to update the mailing address on all your rental properties. This is often over looked if you have your mortgage company escrow and pay your insurance and taxes.
The way you hold title is also important. Using and corporation or LLC is fine but be prepared to prove that you own the company. Also you will want to hold title in your personal name on any property you are refinancing. If you are planning to refinance a rental that is currently in your LLC go ahead and deed it back to yourself personally before you apply for that loan. Again this is something that you can normally get around but it will make the process much easier if it is done up front.
#3 – Don’t Even Think of Under Pricing Your Property in the MLS
This is a big one that I see a lot. Tell me if this sounds familiar. Investor buys a house and fixes it up to sell. It does not sell so she lowers the price several times. Finally she realizes that her best option is to refinance and keep the house so she takes it off the market and starts the refinance process. The highest appraised value she can hope for is the lowest list price. My suggestion is to drop the price down to where you need it to appraise and if it does not sell at that price start your refinance. It makes since when you think about it. How can the value of the house be more than what it was listed for if it did not sell?
#4 – What is it That You do for a Living?
Underwriters hate real estate and real estate related professionals. There is probably some merit behind their concerns as our industry has been decimated since 2007. This might surprise you but many underwriters will deny a loan just because of the profession you are in.
The good news is you have some control over the underwriters view on what you do for a living. If you are self employed it is best to form an LLC or Corporation and try to keep real estate out of the name. Underwriters really hate investors so keep anything related to investing out of the name. Examples of bad business names are John’s Investing, Jane’s Home Buyers, Kyle’s Property Investors, etc. Also when asked what you do for a living don’t say real estate investor. It is best to say something like business development, consultant, or manager.
#5- Your Schedule E
This one is a bit more complex and is where you really want to work with your mortgage broker. It is all about making sure your Debt to income ratio (DTI) is inline. Again if you don’t know what DTI is check out the article. There is one simple thing you can do to control the amount of write offs with a property and is especially easy the first year you own something. It has to do with the way you enter improvements or repairs.
Most people will make a repair and expense 100% of it. For example, you replace the water heater for $500 and you take a $500 deduction. That is not necessarily the wrong way to do it and you will pay less taxes that way but another way to enter that same $500 is to add it as an asset to your balance sheet and deduct that $500 over several years. That way you are not taking the full $500 loss in one year. You can probably see that this can turn into much bigger dollars when you first buy a house and make several repairs to get it ready to rent.
#6 – Control of Your Income
Another strategy that gives you some control on your income is when you collect option money from a tenant buyer. You can make the augment that it is not taxable until the tenant moves out or buys your house. In fact that is probably the right way to do it and is how I report the option money that I collect. This way I get money now but pay taxes on it several years from now. With that said I don’t think the IRS would mind if you counted it as income the year you collected it and pay taxes on it now. This would help increase your income for that year.
I know this is a lot to take in. It is all about long term planning for your business needs. I would print this article as well as a few of Local Records Office’s article and keep them as a reference to help ensure the loans are available when you need them.
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