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Formerly self employed now on salary, but only for 2 mos. Can I get a mortgage?

I have been a 25% owner of a company since 2006 and we made losses every year.  I had been paid on a draw, hence no W2's.  My 1040s and schedule K for 2008-9 show large losses.  I have since sold shares to my partner to cover losses and now own 12.5% of the company.  At the start of this fiscal year (Sept 1st 2010) I changed to a salaried W4/W2 employee with withholding.  I make $69k gross a year, $12k in bonuses, and have an employment contract. 
I can show my draw history over the last 2 years, and the last two paystubs.  I have a 750-765 Fico, and 50k cash available for 10% down, closing costs and a 6mos mortgage reserve. 
I have an accepted offer on a condo in Bushwick, Brooklyn for 288k with the seller paying transfer tax and a 3% closing credit. 
What do I need to do to get a mortgage? Is it possible?
  • October 24 2010 - Bushwick
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Answers (16)

Salary and on W2 is better. But the fact that it's still your company you will still be adding in the loses for the past two years of tax returns and doing an average on the loses. They will count your salary at full value. Not the bonus as you need a two year history.
Better way is to sell out completely and have your salary increased, no bonus. Then the lender will count it (salary) and would not be counting the prior years loses.

Or get a co-borrower.

Check with several local lenders.
Good Luck
  • October 24 2010
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Thanks for the quick reply Jim.  I do have the option to sell my remaining share in the company and continue as an employee.  The losses aren't a problem for my partners as they are very well funded and the company is growing.

If I understand you correctly, the previous losses are of no consequence as long as I have sold my remaining ownership?

Thanks in advance!
  • October 24 2010
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Talk to your accountant or someone that can fully understand your situation. If you have a corporate lawyer or financial guy, ask them if this will really satisfy the lender.

With only 2 W-2 paycheck, I seriously doubt selling you company completely will help much. Talk with a direct lender (maybe someone from your company's bank?) and run the idea by them first. Even if they don't give you a loan, it will be good to see what a bank have to say.


Maybe see if you can borrow the funds to buy a house from your company's other well-funded investor.
  • October 24 2010
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It's also my understanding that percentage of ownership less than 25% are considered investors rather than self-employed owners. 

How am I any different than any other guy who owned a business and sold it, and is now employed?

I've got to find a way to make this work (other than borrowing from my partners).  There has to be an option on how I can explain it in an application.  Would it be more likely to get approved with 20% down and no PMI?

I've never had a late payment in my life and currently earn enough to cover the mortgage.  Ideas?
  • October 24 2010
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Your scenario is unique and will require an actual Underwriter to approve. It may require at least 6 months of pay stubs, since you have no history of receiving salaried income. Automated U/W would not be sufficient, so I would get a referral to a local direct lender (bank, credit union, mortgage banker etc. that actually funds loan) and apply for a pre-approval. Be aware of any language/clause in the Sales Contract that you have already signed, that may put your earnest money deposit in jeopardy if loan approval is not obtained with in a specified time period.
  • October 24 2010
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In my simple view, the fact your company has consistently lost money would cause me to think it cannot continue to pay your new salary indefinitly.  Technically speaking, changing from self-employed to W2 employee should allow you to use your W2 wages to qualify for a loan; however I think your companies ability to pay you needs to be considered by underwriting.  Also, selling 1/2 of your interest in the company should be carefully examined - if the consideration for your shares was forgiving your portion of prior losses, the value of your remaining interest appears to have a negative value.

As long as everything was done with full disclosure, and you're willing to share the company returns to show the company can afford to pay you; it's worth getting a thorough review by an Underwriter that can approve your loan.

  • October 24 2010
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Thanks Steve,

The company has been growing every year by 20-40% so the losses are from funding expansion. We expect to make a small profit this year.

The company that pays me is an LLC, which is owned in part by another LLC, of which I'm a minority partner.  So in fact I am paid by a different entity then the business which issues my Schedule K. 

This being said, can I apply for a mortgage with 2 mos employment history, and an employment contract, while showing my 2008-09 tax returns (and losses) from when I was a business owner?  How much consideration is given to my current employment situation, versus my past?
  • October 24 2010
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Sorry Steve,

I forgot to answer about the losses.  I sold some of my shares to one of my partner for cash,  which I then put back into the company to cover my share of the losses.  My partners also contributed according to their ownership percentage to cover the losses.  Each year we covered any losses with a cash injection.

  • October 24 2010
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All the advice given to you is very accurate.   Your biggest problem is going to be as stated above about the losses you showed and you would have to show great documentation to get an underwriter to overlook the losses. But an underwriter will see it as everyone is now requiring IRS transcripts and that would halt your loan immediately.  Best advice is to sit down with a local loan officer, provide all the documentation you are telling us and have it run by an underwriter prior to purchasing a property.  If they approve it great, if they decilne it, they will tell you why and you can then work in the direction to correct the issue and go from there.   20% down would definitely be a better way to go as you would not have to go through PMI Underwriting as well.  I think if you had gone to work somewhere else as a W-2 employee you might have an easier time.  But, as mentioned above, the problem is you are working for the same company and an underwriter may not be comfortable in your continuing to receive this income because of the losses AND they may feel you just did that to quailfy for a loan.   I wouldn't give up, but I'd definitely have it looked at by an underwriter.
  • October 24 2010
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Jayne,

I have the option to sell my remaining shares for around 75K.  Would that change the picture completely?   I could then put 20% down and be completely severed as an owner. 
  • October 24 2010
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I agree with all of the other information posted. The key will be to show the U/W that you have elimitanated the losses from the previous years. And the lenders will count your new W2 salary. They will want to see at least 30 days of pay stubs. Your situation is very unusal and I agree that you need to have your file presented to an U/W for a full approval.
Find a local loan officer and review your options.
Good Luck
  • October 24 2010
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So I suppose going to my bank (M&T, who I've done personal banking with for 15 years) is better than using a mortgage broker in my case? 
  • October 24 2010
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I do not believe you need sell all remaining shares.  In order for an Underwriter to properly eveluate your income, they need to understand your unique circumstances. 

If your Employee (W2) pay was from a different company, you would have no problem whatsoever.  However since you're with the same company, the fact that your ownership is now under 25% doesn't change enough in my view to believe you are not still self employed. 

If I were submitting your loan, my initial structure would be to provide documentation for Self-Employment, but base your income on your current salary.  The documentation needed would be 2 years Business and Personal Tax Returns (returns and K1's for both businesses) and a YTD P & L for the company.   Further income analysis would have to be performed to consider the company's strength to continue your salary. 

As mentioned before, with full disclosure, I think is very possible that you'll be able to use yoru current salary for qualification; but make sure you allow plenty of time for this sale to occur, I have a feeling the time needed to satisfactorily build your case will take a while.

  • October 24 2010
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Just speak with a local mortgage lender that you trust and they will be able to answer your question the best.
  • October 24 2010
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Yes........ doesn't mean there would not be other options but talking to a M &T loan officer should give you their input prior to submitting a complete loan application to Underwriting.
  • October 24 2010
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You need to be in the same line of work for the last 2 years  2008 and 2009 tax returns, Along with 2 most recent paystubs.  You will have to qualify with this income.  If you go with a conventional loan you will need a 640 or better credit score.  If you go FHA it is easier to qualify for.

  • October 25 2010
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