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Old 03-02-2014, 12:26 PM
 
9 posts, read 17,566 times
Reputation: 14

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Could use some perspective...

Background: About 8 months ago, I made partner at a large professional services firm (firm is approx 150 yrs old, about 100,000+ people - very stable). I've worked there for about 13 yrs. My gross income increased by about 56% this year, though of course I now pay more tax at a significantly higher marginal tax rate (which now includes self-employment tax). As part of the new role, I'm an equity partner receiving K-1 income rather than an employee receiving W-2 income - guaranteed payments in the first year, then a share of income in subsequent years. I'm told that I can expect fairly stable cash flows over the next 5 years increasing by about 10-15% per year during that period (although this is not documented anywhere). My credit score is about 785.

I'm considering buying a new home in Washington DC. Could come up with 20% down if necessary, but would rather do a bit less. Plan on doing a 30-yr fixed rate. The loan will be about $400K more than the conforming loan limit in my area -- definitely a jumbo. I'd like to move on this quickly because I'm concerned mortgage rates will rise over the next year and home prices in downtown DC keep climbing.

Here are my questions:
1) Am I likely to be viewed by a lender as a newly self-employed person (and more risky) or more like a salaried employee given the length of my tenure at the same firm and the stability of the firm? I've read other posts by new doctors, who seem to suggest that lenders view them more like employees if they are partners in a stable practice.
2) I understand that lenders look for 2 years of income history. In practice, what do they do with the prior year's income level? Given the 56% increase in income, would they average the two years of income? And, when do they count the income? I'm filing a tax extension until September 2014 for 2013 taxes, but will have fully paid 2013 taxes by April 2014. Does a lender need to see the filed tax return, or is the fact that I have a K-1 in hand and have paid the estimated taxes enough for them to consider the associated income?
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Old 03-02-2014, 12:29 PM
 
3,749 posts, read 8,137,694 times
Reputation: 4803
They will require two years of filed tax returns under the new circumstance, business and personal, and will not consider prior W2 income.
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Old 03-02-2014, 02:20 PM
 
9 posts, read 17,566 times
Reputation: 14
Disappointing -- but appreciate the feedback.
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Old 03-02-2014, 11:02 PM
 
Location: Johns Creek, GA
120 posts, read 142,118 times
Reputation: 123
It's in instances like these that the new mortgage regulations reveal their stupid, ugly side. Any lender should be happy to give you a loan because your situation makes good sense.

As a small business owner with a new but very profitable venture, I am having great difficulty finding any reasonable mortgage for myself despite making six figures a year. This is not right.
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Old 03-03-2014, 06:10 PM
 
9 posts, read 17,566 times
Reputation: 14
Yes, it's very frustrating. On one hand, I can see the logic. I.e., why would you give a huge sum of money to someone with an unproven business or new situation?

But, when you're still working at the same job, doing the same thing every day, but receive your compensation through a K-1 instead of a W-2, it seems somehow unfair to basically say that your earnings history doesn't count. Oh well...
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Old 03-04-2014, 07:44 PM
 
Location: MID ATLANTIC
8,045 posts, read 19,712,187 times
Reputation: 9071
Quote:
Originally Posted by aphil02 View Post
Could use some perspective...

Background: About 8 months ago, I made partner at a large professional services firm (firm is approx 150 yrs old, about 100,000+ people - very stable). I've worked there for about 13 yrs. My gross income increased by about 56% this year, though of course I now pay more tax at a significantly higher marginal tax rate (which now includes self-employment tax). As part of the new role, I'm an equity partner receiving K-1 income rather than an employee receiving W-2 income - guaranteed payments in the first year, then a share of income in subsequent years. I'm told that I can expect fairly stable cash flows over the next 5 years increasing by about 10-15% per year during that period (although this is not documented anywhere). My credit score is about 785.

I'm considering buying a new home in Washington DC. Could come up with 20% down if necessary, but would rather do a bit less. Plan on doing a 30-yr fixed rate. The loan will be about $400K more than the conforming loan limit in my area -- definitely a jumbo. I'd like to move on this quickly because I'm concerned mortgage rates will rise over the next year and home prices in downtown DC keep climbing.

Here are my questions:
1) Am I likely to be viewed by a lender as a newly self-employed person (and more risky) or more like a salaried employee given the length of my tenure at the same firm and the stability of the firm? I've read other posts by new doctors, who seem to suggest that lenders view them more like employees if they are partners in a stable practice.
2) I understand that lenders look for 2 years of income history. In practice, what do they do with the prior year's income level? Given the 56% increase in income, would they average the two years of income? And, when do they count the income? I'm filing a tax extension until September 2014 for 2013 taxes, but will have fully paid 2013 taxes by April 2014. Does a lender need to see the filed tax return, or is the fact that I have a K-1 in hand and have paid the estimated taxes enough for them to consider the associated income?
Not everyone is in the same box. I just accepted a position as a loan officer with a local portfolio bank that offers a "Professional" product that allows for a newbie professional (defined as postgraduate degree) where a degree was received as little as 6 months ago, but no more than 24 months (which eliminates your situation, but bear with me) in their field if it can be reasonably documented that income potential has not been reached and likely to increase over the next 24 months. "Projected income is acceptable of the new job will be started within 60 days of loan closing if there is a non revocable contract for employment." This loan product is available to new physicians, legal professionals, engineers, physicists, chemist or geologist. It is a 10% down (no PMI) product with a max of 1M loan amount. (Manual underwriting only).

Clearly, this would not be a product for you if you have been there for 13 year, this is designed for the new graduate. My point is though, not all lenders are the same and never before has there been a need to really shop what you are looking for and to keep looking and keep asking. My niche has always been portfolio lending, so when I interviewed with local banks, finding these products was a priority for me. The programs are out there.
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Old 03-04-2014, 09:17 PM
 
Location: Johns Creek, GA
120 posts, read 142,118 times
Reputation: 123
Quote:
Originally Posted by SmartMoney View Post
Not everyone is in the same box. I just accepted a position as a loan officer with a local portfolio bank that offers a "Professional" product that allows for a newbie professional (defined as postgraduate degree) where a degree was received as little as 6 months ago, but no more than 24 months (which eliminates your situation, but bear with me) in their field if it can be reasonably documented that income potential has not been reached and likely to increase over the next 24 months. "Projected income is acceptable of the new job will be started within 60 days of loan closing if there is a non revocable contract for employment." This loan product is available to new physicians, legal professionals, engineers, physicists, chemist or geologist. It is a 10% down (no PMI) product with a max of 1M loan amount. (Manual underwriting only).

Clearly, this would not be a product for you if you have been there for 13 year, this is designed for the new graduate. My point is though, not all lenders are the same and never before has there been a need to really shop what you are looking for and to keep looking and keep asking. My niche has always been portfolio lending, so when I interviewed with local banks, finding these products was a priority for me. The programs are out there.
Hmm, that's very interesting... Not to hijack the thread, but I received my Master's Degree in December 2012. Do a lot of states have lenders with similar programs? What documentation would be required?
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Old 03-05-2014, 06:10 AM
 
Location: MID ATLANTIC
8,045 posts, read 19,712,187 times
Reputation: 9071
The programs out there target specific fields where professional incomes are expected to grow rapidly to the norm for their career.

I would recommend you do a search for the top 20 Regional Banks (maybe 30) in your state and neighboring states - someone may stand out.

One other way - locate the local MI rep for your area (MGIC, Genworth, Radian) via their corporate websites. The MI reps know who has boutique or niche offerings within their territory....and having a buyer referral for a mortgage company would be a huge.
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Old 03-05-2014, 03:35 PM
 
Location: Johns Creek, GA
120 posts, read 142,118 times
Reputation: 123
OK, thanks. I am actually not buying in Michigan. I am looking to move out of the state, interested in Seattle, Atlanta.
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Old 03-05-2014, 04:07 PM
 
5,208 posts, read 4,510,024 times
Reputation: 15102
Quote:
Originally Posted by aphil02 View Post
Could use some perspective...

Background: About 8 months ago, I made partner at a large professional services firm (firm is approx 150 yrs old, about 100,000+ people - very stable). I've worked there for about 13 yrs. My gross income increased by about 56% this year, though of course I now pay more tax at a significantly higher marginal tax rate (which now includes self-employment tax). As part of the new role, I'm an equity partner receiving K-1 income rather than an employee receiving W-2 income - guaranteed payments in the first year, then a share of income in subsequent years. I'm told that I can expect fairly stable cash flows over the next 5 years increasing by about 10-15% per year during that period (although this is not documented anywhere). My credit score is about 785.

I'm considering buying a new home in Washington DC. Could come up with 20% down if necessary, but would rather do a bit less. Plan on doing a 30-yr fixed rate. The loan will be about $400K more than the conforming loan limit in my area -- definitely a jumbo. I'd like to move on this quickly because I'm concerned mortgage rates will rise over the next year and home prices in downtown DC keep climbing.

Here are my questions:
1) Am I likely to be viewed by a lender as a newly self-employed person (and more risky) or more like a salaried employee given the length of my tenure at the same firm and the stability of the firm? I've read other posts by new doctors, who seem to suggest that lenders view them more like employees if they are partners in a stable practice.
2) I understand that lenders look for 2 years of income history. In practice, what do they do with the prior year's income level? Given the 56% increase in income, would they average the two years of income? And, when do they count the income? I'm filing a tax extension until September 2014 for 2013 taxes, but will have fully paid 2013 taxes by April 2014. Does a lender need to see the filed tax return, or is the fact that I have a K-1 in hand and have paid the estimated taxes enough for them to consider the associated income?
I was in a similar situation a few years ago - despite my excellent credit scores, having way too much money in the bank, having been in the same position for over five years earning nearly 3/4 of the price of the home/year, I couldn't get refinanced into a lower rate because I had only been self employed for a year, even though it was the exact same work, in the same office - just changed from a paystub to self employed. It was just insane. They're gonna want to see tax returns for two years, with rising income. It would help if you could do your 2013 taxes now, so that you'd have a return to show them.
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