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Old 01-06-2010, 12:28 AM
 
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I am a student and self-employed. As a first time home buyer, I really want to buy an apartment this year because not only the property is inexpensive where I want to buy, but also I will be able to rent out rooms to other students and generate cash flow. In other words, it makes a lot of business sense to get a place.

My situation is this: I make about 14K/year, have about 15K of debt, and am self employed. My FICO score is over 760 and I am paying off a car that has about $6K left which I intend to pay off in the next month, before I apply for a loan. This should further increase my FICO score palpably and decrease debt-to-income ratio. The property I am trying to buy ranges from 70K to 130K. I am looking for FHA with 3% down. I do have the option of a cosigner, but due to the title complications, I do not want to add anyone’s name to my property and would ideally like to avoid this. Here are my questions:

1.Every year I make about 50% deductions. Would it help if I make no deductions at all this year (or very little)? I do my own taxes – itemized, schedule C

2.I have hobbies that generate supplemental income often with cash and I do not keep diligent track of these and they go unreported. I know that they should be reported. So I am thinking – what if I not only report all this supplemental income, but also perhaps approximate to a large number to increase my income for 2009? Yes, I will end up paying more taxes, but it should also help me get approved for a loan by myself. The reason I am asking this is because I know someone who tunes pianos. Many of his customers pay him by cash. Before he bought a place, he told me that he basically exaggerated his income on his taxes to make it easier for him to qualify for a large loan for a pretty healthy property in SoCal. I wasn’t sure how he could do this, but I thought that since he gets income in cash and is self-employed, the reporting of how much he has earned is completely up to him and while the government prosecutes tax evasion, is probably happy for guys like him to report high income and pay a large tax.

3.My only asset is my car. I have sort of a dilemma – I have about 14K in the bank. Of this, I must retain at least 5K for down payment and as savings. But what about the rest? Should I use it to pay off my debt completely so that my debt-to-income ratio is even lower or do the banks rather see a large balance in my checking or savings account? I just don’t know what’s the sweet spot here. And by the way, I have not paid off my debt right away mainly because all of it is fixed at 2.99%. So I really need to know whether it is better in my case to have about 15K in the bank and about 15K debt OR about 5K in the bank and about 5K debt. My low income says that the latter should be much better to significantly lower my debt-to-income ratio, but then again I don’t know if having fewer assets will be even worse.

I must really make this property happen this year before the first time home buyer tax credit expires and would like the experienced members who are loan officers or know a lot about loans to give me some tips and point me in the right direction. Note that I am not buying a place for pleasure – it is a good business venture for me with $8K federal credit, perhaps another up to $10K local credit due to local first time home buyer program, and another extra $200-500/month as a cash flow income due to renting the rooms out to students.

Last edited by Excelsius; 01-06-2010 at 01:01 AM..
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Old 01-06-2010, 05:05 AM
 
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With a income of 14000 a year ;I doubt that your going to get that loan really.That is below poverty level on reported income.Too late now to thinkj about not reporting income.
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Old 01-06-2010, 06:05 AM
 
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I agree with texdav. An annual income of 14k is really hard to get for a loan approval that big. A loan company will let you sign some papers and ask for supporting documents regarding your properties and your household income as well. Here's what I found, $500 payday loans. I believe that they offer loan on a minimal requirements, not sure if they can help you out with the exact amount you need though.
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Old 01-06-2010, 08:48 AM
 
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#1 -- Income is too low. Even if the property you are considering is only $50K or so you have a big stretch to make that work. $70k -- 130K ? You are dreaming...

#2 -- Lack of employment history. Employment is not the same as "earning". One thing to be long term successfully self employed, and another thing to have a low income but at least some stable on-going employment. To be making very little money and working for yourself together are two big risks that lenders are not willing to take.

#3 -- Student. You are not working full time, and thus if class gets too hard your earnings may fall even farther. You have not finished your education so if you have to drop out to earn more you will not have the sheepskin to increase your income down the road. Both are bad risks as far as lender is concerned.

#4 -- History of unreported income. There are companies that right now are selling "personality based risk evaluation software" to lenders that will go through things like criminal back ground check, earnings history, tax forms and even survey to help lenders decide if you are the kind of person that has a history of doing things likely to leave the lender holding the bag. I do not know how widely used these things are but I would be worried that if a lender ran your info through such a tool it would send up some red flags. The fact is, like you and your "paid in cash" friend have figured out, there were a whole lot of folks doing everything from working in casinos to carpentry too often those "paid in cash" could conspire with a less than honest loan originator to "create" pretty much any income needed to qualify for a mortgage. When the reality of the rising payments and lack of real earnings collided the result is mortage default. Do it for enough people and the result is real estate melt down. Lenders are trying to avoid a repeat of this...

#5 -- Bizarre financial picture. You owe about $15K, you earn about $15K, you have about $15K in the bank. Hmm let's see, debt:income is 1:1 and net worth is basically zero. This is not good. Really. You want your debt to be about 1/3 or so of income and ideally net worth to be some postive multiple of income. You know the scene where Mr. Potter ridicules George Bailey for having " No securities, no stocks, no bonds. Nothin' but a miserable little $500 equity in a life insurance policy." ? George was only tryin to borrow $8k that Uncle Billy accidentally slipped to Mr. Potter, you want 10x+ that. See the problem? Worry less about "redistributing" your savings and debt and much more about having a) less debt b) more assets c) greater income. Really I am not just being a "warped frustrated old man" I am telling you that you are wasting your time trying to over leverage yourself to "get a good deal" when you should instead be focused on making the kinds of financial decisions that are sustainable.

The advice I am giving you is based on my experience as a real estate investor and agent. It is mainstream and solid. If you want to read up and some crazy story of folks that "get rich quick" by overleveraging themselves than you ought to know that MOST of those flame out and a whole lot end up broke and on the wrong side of the law John T. Reed's view of various real estate investment gurus
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Old 01-06-2010, 09:54 AM
 
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Thanks for all the responses, but I still did not get much practical advice. I am not trying to game the system. Also, I have been consistently making 10K or more for the last five years at the same company as a contractor and during the three years I also worked for a famous aerospace company as an employee, but again, part-time (in addition to the other job). I have always worked and don't have any lack of history. No need for gratuitous assumptions. I took a break from school to probe the job market. Had I known that the stocks would have crashed so low and real estate as well, I would have not gone back to school until I made some money. I invested about 2K and was able to almost double it, but that was not enough money to make significant headway. I just don't want to miss the real estate wave as well.

My assets will be 5k to 10K if I pay off my car and 10K of debt, not 0. But I don't know if they look at a car as an asset. I am referring to the bluebook value.

If I pay off 10K of my debt, do the math. My debt-to-income WILL be 1/3, even less. But I will have 10K less in the bank. This is what I asked in my question and would like an objective response please whether it is better to have less in the bank and less D-I ratio or more in the bank and less D-I ratio. I already know that yes, more income is better, more assets are better, etc, etc, etc. That does not answer my question. Again, if you want to preach, it's ok as long as I also get some practical advice. It would also help if you remember your student days and realize how much harder it is these days in this market. My generation is pretty screwed as it is and preaching is not what's going to help us. We need some practical advice to survive this mess created by our great predecessors...

So basically you are saying that I must have a cosigner? One thing is not clear to me - first of all, I have not done my taxes yet and I might eventually have about 20K of income. You guys say that's too low, but at the same time that's only about 10K lower than the max allowed income to qualify for the FTH buyer program. If about 32K is the max, then I'd figure that 20-30K is the range where most applications will fall for FTH/FHA.

Please do not approach this case as "get rich quick" scheme. I know what I am doing and have done calculations down to property tax, association fees, insurance, and emergency repairs. There is a reason why my credit score is higher than many people who have significantly higher income and almost no debt. And as far as the implication that it is this class of people who caused the financial meltdown, then you are missing the point. Yes, these people were misinformed and were tricked, but the real villain here is that "smart" guy behind the desk who gamed the system and sold properties at very high prices and interest rates. Before you even think about blaming the little guy, look at the top. That's where the sh*t started and trickled down. A true sh*itonomics. These are the same people that prevent entrepreneurs like me to rise up because everywhere we turn we face either red tape or some fat cat cynic who's best role is as a patronizer. It's people like Potter who f up our country and then leave the **** for Georges to clean up.

Anyway, I really don't care about political discussions here. If you truly believe I can't get a loan, then please tell me what are my options: e.g., what is the profile of a cosigner I will need to get approval? What minimum requirements will I have to meet to be able to get the loan myself? At least I would start working on these.
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Old 01-06-2010, 11:02 AM
 
Location: Plano, Texas
1,675 posts, read 6,810,496 times
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If your income is 20k per year, monthly you would make $1650. FHA will generally approve loans up to a DTI of 45% and going as high as 50% with extenuating factors.

This would approve you to total debt payments of only $800. Any debt showing on credit would count against that income, including min. payment to credit cards, student loans, car loans, etc...

Not sure what state you live in, in Texas, property taxes are high due to no state income tax. So a purchase price of about $90,000 would give you a mortgage payment of about $800 per month. With the price range you are looking in, you would have to pay off all other debt and you would qualify to about $90k.

The way i see it, you are probably paying rent of $500 t0 $800 per month. If you can make a rent payment, you can make a mortgage payment.


Your car would not be considered an asset for qualifying for a mortgage.
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Old 01-06-2010, 11:02 AM
 
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Again, I am going off the data you supplied and with the standard assumptions that lenders are making in the current environment.

If you can goose you reported income up to $20K you'd still need a cosigner. The characteristics that would get the co-signed loan approve would be TOUGHER than if you could qualify on your own. The co-signer will have to meet a stricter debt:income standard, and have a credit score higher than for a for a stand alone borrower.

There is a big gap between what your current income is and the numbers that lenders like to see -- the limits on where the tax credit ends are $75k/indivual & $150K/couple. Federal Housing Tax Credit: Tax Credits at a Glance (http://www.federalhousingtaxcredit.com/glance.php - broken link) I have no idea why would think there are people handing out loans to folks making $30k a year, because that is just not supported by data. Do the math on the ratios and you will quickly see that the median prices suggest that people have houselhold incomes much closer to $50K. Federal Housing Tax Credit: Tax Credits at a Glance (http://www.federalhousingtaxcredit.com/glance.php - broken link) Business & Technology | Number of FHA loans jumps locally | Seattle Times Newspaper That is simply a lot more money that you are earning. I am not saying this out anything other than simple reality check -- lender were burned (are being burned...) by folks walking away from mortgages. Even though they do not get stuck with bad debts on FHA loans they are very reluctant to make loans to anyone that does not meet the standards simply because they any defaults will hurt the value of collateral that they have on other loans.
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Old 01-06-2010, 11:06 AM
 
Location: Plano, Texas
1,675 posts, read 6,810,496 times
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Quote:
Originally Posted by chet everett View Post
Again, I am going off the data you supplied and with the standard assumptions that lenders are making in the current environment.

If you can goose you reported income up to $20K you'd still need a cosigner. The characteristics that would get the co-signed loan approve would be TOUGHER than if you could qualify on your own. The co-signer will have to meet a stricter debt:income standard, and have a credit score higher than for a for a stand alone borrower.

There is a big gap between what your current income is and the numbers that lenders like to see -- the limits on where the tax credit ends are $75k/indivual & $150K/couple. Federal Housing Tax Credit: Tax Credits at a Glance (http://www.federalhousingtaxcredit.com/glance.php - broken link) I have no idea why would think there are people handing out loans to folks making $30k a year, because that is just not supported by data. Do the math on the ratios and you will quickly see that the median prices suggest that people have houselhold incomes much closer to $50K. Federal Housing Tax Credit: Tax Credits at a Glance (http://www.federalhousingtaxcredit.com/glance.php - broken link) Business & Technology | Number of FHA loans jumps locally | Seattle Times Newspaper That is simply a lot more money that you are earning. I am not saying this out anything other than simple reality check -- lender were burned (are being burned...) by folks walking away from mortgages. Even though they do not get stuck with bad debts on FHA loans they are very reluctant to make loans to anyone that does not meet the standards simply because they any defaults will hurt the value of collateral that they have on other loans.

Chet, i dont know of any lenders with a minimum income requirement. They will simply look at monthly income and monthly debt payments. If the OP pays off all debt, he could easily qualify for a home in the 75k to 90k. Assuming he makes $20,000 per year after all deductions.
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Old 01-06-2010, 12:04 PM
 
4 posts, read 11,175 times
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Quote:
Originally Posted by VictorBurek View Post
If your income is 20k per year, monthly you would make $1650. FHA will generally approve loans up to a DTI of 45% and going as high as 50% with extenuating factors.

This would approve you to total debt payments of only $800. Any debt showing on credit would count against that income, including min. payment to credit cards, student loans, car loans, etc...

Not sure what state you live in, in Texas, property taxes are high due to no state income tax. So a purchase price of about $90,000 would give you a mortgage payment of about $800 per month. With the price range you are looking in, you would have to pay off all other debt and you would qualify to about $90k.

The way i see it, you are probably paying rent of $500 t0 $800 per month. If you can make a rent payment, you can make a mortgage payment.


Your car would not be considered an asset for qualifying for a mortgage.
Thank you for the useful information. And exactly - not only am I paying the rent, but I am also wasting about $300 a month commuting + car depreciation because I have to drive to school and don't have the stomach to enter into another one year lease near school and have to pay even higher rent for just one room while someone else is getting wealthy off of me. This is not the right market to pay rent. My friend has made a lot of money buying properties and renting it out. He's another student (graduate) as well. How did he do it? Well, he is lucky to have a wealthy daddy who helps him and is also in the real estate. The best I can do is work close to full time while being a full time student and also hope that if I need a cosigner my mothers very unimpressive income will help me. I have a friend who could also help and makes a lot, but again, I don't want to go into joint property venture with non-family.

I am in SoCal. Property tax is 1%. I'm looking at association fees of $150-200/month. Are these also counted into the DTI ratio? They probably are.

From what you said, I think it will be my best bet to pay off as much debt as possible. So I will definitely pay off my car and another $4k of cc debt leaving me only around 4-5K of debt. I am also assuming that my educational loans do not factor into DTI because I am only getting subsidized loans that will not have to be paid off until after I am done with my entire education - graduate school + post-graduate training/residency. Am I correct to assume that? The education debt is about 5K for now. I am also receiving annual grants and scholarships amounting to another 10K or so, but I am sure these are not factored into income for loan purposes.
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Old 01-06-2010, 12:12 PM
 
4 posts, read 11,175 times
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Quote:
Originally Posted by chet everett View Post
Again, I am going off the data you supplied and with the standard assumptions that lenders are making in the current environment.

If you can goose you reported income up to $20K you'd still need a cosigner. The characteristics that would get the co-signed loan approve would be TOUGHER than if you could qualify on your own. The co-signer will have to meet a stricter debt:income standard, and have a credit score higher than for a for a stand alone borrower.

There is a big gap between what your current income is and the numbers that lenders like to see -- the limits on where the tax credit ends are $75k/indivual & $150K/couple. Federal Housing Tax Credit: Tax Credits at a Glance (http://www.federalhousingtaxcredit.com/glance.php - broken link) I have no idea why would think there are people handing out loans to folks making $30k a year, because that is just not supported by data. Do the math on the ratios and you will quickly see that the median prices suggest that people have houselhold incomes much closer to $50K. Federal Housing Tax Credit: Tax Credits at a Glance (http://www.federalhousingtaxcredit.com/glance.php - broken link) Business & Technology | Number of FHA loans jumps locally | Seattle Times Newspaper That is simply a lot more money that you are earning. I am not saying this out anything other than simple reality check -- lender were burned (are being burned...) by folks walking away from mortgages. Even though they do not get stuck with bad debts on FHA loans they are very reluctant to make loans to anyone that does not meet the standards simply because they any defaults will hurt the value of collateral that they have on other loans.
I do not know anyone who has a higher credit score than I do. The friend that I have is a working professional making about 150K from the company alone, but the FICO score is still around 740.

And you are wrong. I don't know what data you're looking at, but my local FTHB program has a 36K limit for an individual. That's right, that's 35,500 because that's the 80% of the mean or median income. Do you seriously think everyone makes over 60K or so? Even PhDs don't always have that privilege. And this program is offering 20% down up to $75K. Combine that with the federal credit and the fact that my local market has been hard hit in home prices (they are down over 60%, much more than other areas), I am compelled to act now. If you were correct, then it would make one wonder how can the local government impose a 36K income limit when according to you no one is supposed to get a loan at that sum.
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