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I've heard it said that there is no such thing as a stupid question...let's test that theory. I am looking to buy my first home and have a question regarding what proof of income lenders rely on for determining how eligible you are for a loan. My financial situation is slightly abstract...I was self-employed and living in a rental house for years until a hurricane destroyed both the house and my business, and since that time (2011) I have been relying on income from a trust, of which I am the sole beneficiary with a seven-digit market value. My monthly income from the trust equates to a minimum of $54K a year and in the last 6 months I have been able to supplement that a little better. For example, looking at my checking deposits from 4/8/13 to 6/26/13 my income was $12,330 during that time period. The down side...the trust's K-1 form reported on my 1040's references only about $20K/year of income from the trust because of how the taxes for the disbursements are structured. So going by taxes alone my income appears to be a mere $20K a year although it is higher than $60K in reality (which is backed up solely by deposit slips and numbered "Advice of Deposits" from TD Wealth management). My credit score is in the 700's but just barely; I have an American Express I pay off monthly and a MasterCard I usually make minimum payments on...both in good standing now with never a 90-day late payment on either. I paid off a car loan in 2011 and have another in good standing with about a year left on it at $273/mo. Been paying about $1300/mo rent for years with no problems. My question is, are taxes alone the sole reference used to determine eligibility for a mortgage? Is there any other way to show actual income that would be accepted? I mean as a small business owner, I wrote as much off as I legally could. Any advice? I have been reluctant to start a new business just because I do not plan on staying in this area and did not want to drastically alter my financial picture before applying for a loan.
You don't want to start a new business because you don't plan on staying in the area. Yet you want to buy a home now? If you don't plan on staying put for at least 5-7 years it might be better to continue to rent.
There's no way to know if you would gain any profit or even break even if you sold prior to that length of time.
But back to your question. You''ll need to prove that the trust is irrevocable. You'll need to prove trust income for at least a couple of years into the past and be able to prove that it will continue for at least three years into the future after the closing of the loan.
That means you may have to provide the original documents setting up the trust; verify the amount in the trust. You'll have verify the distribution and duration of payments to the satisfaction of the lender who is going to want to see a continuity of payments going forward.
I want to purchase a home in Maine but I live in Western MA. Like I said, I had a rental here for years in a perfect location but the entire property was washed away so I'm in a house now that was a best-case scenario at the time but not an acceptable long term solution. We stayed in this area long enough for our daughter to finish elementary school but now I'm ready to leave this area and have found some good deals in southern Maine. So I'm not looking for a short-term investment to flip over in 2 years or anything like that.
The trust is irrevocable (FBO my name only) and I have numbered and dated deposit slip from TD Wealth Management, but only dating back until October 2007. The original trust documents I can obviously get, plus I get quarterly reports documenting market value at the end of every period, realized gain/loss, diversification summaries and every stock bought or sold during that quarter.
Sounds like you have a lot of back-up on the trust.
I am curious, though, it provides you $54k a year but you pay taxes on only $20k a year? And all of that unearned.
When I do freelance work, I want to minimize my taxes by maximizing my expenses ... but of course that means that my "freelance income" (as reported on tax forms) is lower than I might like when I apply for a mortgage or other loan. So it benefits you in one area but maybe not the other.
Yeah but a trust's finances and my own are apples and oranges when it comes to what your net worth is. Exactly, every small business owner wants to minimize their taxes! This is an area where apparently that is not the most advantageous thing you can do. My question is more, how can I present my real income as real income when it seems as if lenders are mostly focused on what you're claiming on taxes, post-Patriot Act? I have little debt, no student loans or anything I'm tied to, and a bare minimum of $54K/year coming in. A credit score in the low 700's isn't optimal but not terrible really. And I've been paying around $1300/mo for rent for years...not that that is taken into account...but for my own budgeting, a mortgage payment in that ballpark is completely doable.
Yeah but a trust's finances and my own are apples and oranges when it comes to what your net worth is. Exactly, every small business owner wants to minimize their taxes! This is an area where apparently that is not the most advantageous thing you can do. My question is more, how can I present my real income as real income when it seems as if lenders are mostly focused on what you're claiming on taxes, post-Patriot Act? I have little debt, no student loans or anything I'm tied to, and a bare minimum of $54K/year coming in. A credit score in the low 700's isn't optimal but not terrible really. And I've been paying around $1300/mo for rent for years...not that that is taken into account...but for my own budgeting, a mortgage payment in that ballpark is completely doable.
"Presenting real income as real income" means that you pay taxes on it. What you pay in rent doesn't really carry any weight here. Regarding Trust income, you will need to provide: Trust, and accompanying Bank statements, for the past two years, showing MONTHLY identical amounts being paid to you, and a statement showing a minimum vested balance that allows for a minimum of three more years of continued identical monthly payments to you, factoring in any other regular payments going to anyone else.
Your net worth might come into play if you choose the only loan type for which you likely qualify: Hard Money.
Visit Welcome home to MGIC and use their SAM worksheet to pinpoint your "official" income for mortgage purposes.
I understand what you're saying; however the way the monthly disbursement is taxed does not reflect the full sum received. I was just stating as far as the rent payments are concerned, for my own budgeting when I was assessing exactly how feasible it was for me to make mortgage payments on the loan amount I was pre-qualified (not pre-approved) for, it was no more than I had already been budgeting for housing for years. I would not be getting in over my head. Bank statements like I said are no problem and are backed up by numbered/dated deposit slips directly from TD Wealth Management. The balance of the trust, like I said, is a seven-digit figure and the monthly disbursements do not even touch the principle...but again I don't think this is referenced as a component regarding my net worth even if I am the sole beneficiary.
Sounds like you have a lot of back-up on the trust.
I am curious, though, it provides you $54k a year but you pay taxes on only $20k a year? And all of that unearned.
Karen, The answer is that the trust is paying a portion of the taxes. This is a very common and legal situation with certain types of trusts.
To the OP: I have a similar situation. From my experience, my credit score (> 770) and significant down payment helped the bank to see the big picture more favorably.
Also - deal with a mortgage broker who ALREADY understands what you are talking about. If you get a blank stare, find another.
Jkgourmet; my credit score is a little lower than yours, although there are some things on my credit report I can dispute in the usual Kafka-esque process. What percentage down payment did you have to put down? When my house got destroyed, FEMA made me go to the SBA first to try and get a Disaster Assistance Loan and I got a lot of blank stares from them regarding how my income was structured (then when I applied for the grant from FEMA they found a loophole because my town government didn't sign up for some program and denied me) and I'm getting some blank stares now, even from TD Banknorth.
Down payment will need to be a minimum of 20% (which is smart to avoid PMI, in any case). Better if you can do 30% or more.
Frankly, I've never even heard of TD Banknorth (I looked them up and had heard of their predecessor, BankNorth). I'd still suggest you find a mortgage broker, not go to a bank, who understands trusts. Perhaps the attorney, financial planner or trustee who handles the trust could suggest someone. IF TD BankNorth is handling the trust and looks at you with blank stares when you asked them the initial question in your OP, I'd be looking for another bank (that's just me, though).
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