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self employed--what is used to determine income?

Discussion in 'Loan Modification' started by missmerryw, May 20, 2010.

  1. missmerryw

    missmerryw LoanSafe Member

    I'm trying to figure out what I need to show for income and expenses to qualify for a loan mod with Wells Fargo.

    I'm self employed and 2009 taxes show:
    • Gross income: 44,250
    • Net profit = 28,500
    • Adjusted gross income = 26,000.
    Mortgage is $2,000/mo.
    Loans and credit cards according to credit report: 825/mo
    Not sure if I should include, but childcare is $560/mo and will soon be going up to $970 with birth of another child.

    What do they use to qualify--gross or net income? Can I be denied if current expenses exceed income?
  2. Evan Bedard

    Evan Bedard Call 1-800-779-4547 Loan Safe Mortgage

    Hi missmerry,

    If you are self employed they are going to use your tax returns and most recent 3-6 month profit and loss statement.


    You probably should increase your expenses until the child is actually born, they will look at your bank statements to verify all the money coming in and out of your account each month. However, once the child is born you may have to go back and re-do your financial worksheet..
  3. missmerryw

    missmerryw LoanSafe Member

    Thanks, Evan!

    Do you know if they will use gross or net income to qualify me?

    If they use Gross income I will have $280 surplus until baby is born and childcare increases--at which point I'll have a $135 deficit.... Using net income I currently have $2200/mo to pay expenses of $2825/mo not even including childcare...

    Looking to get an idea of what I should be showing for income to qualify--and if it's better to omit childcare expenses b/c it looks like I'm in way over my head and cannot afford the mortgage at all. I could get denied if my expenses are way over my monthly income, correct? Difference between gross and net income is substantial so I'd like to know which they use.

    Does the P&L need to be prepared by an accountant or can I do my own? I'm a 1-man shop so I don't have an accountant...

    Any suggestions? Thanks for the help!!!!
  4. tmkim

    tmkim LoanSafe Member

    I'm in beginning as you are and I'm pretty sure it's the net profits. When I asked about that, they said it didn't have to be done by a CPA that you can do it yourself but they also want the returns to match everything with. I have ING and I'm already hating them and I haven't even turned in my worksheet so they can start working on something. We're also going to be getting a consultation with a Lawyer next week.
  5. lisasxr

    lisasxr LoanSafe Member

    They will use the NET PROFIT of your business as your personal GROSS income.

    Based on the above information only - if your yearly NET business income (thusly your personal GROSS income) is $28500 - that would mean your monthly GROSS is $2,375. Based on a HAMP loan modification your PITI payment would need to be $736.25 - that is a long ways away from $2000.00.

    What is your current unpaid principle balance?
    When was the original loan put into place?
    What is the current interest rate of your loan?
    What is the current value of your property?
    What is your current homeowners insurance cost?
    What is your current property tax amount?
  6. missmerryw

    missmerryw LoanSafe Member

    Lisasxr:

    Current principal = $285k
    Loan closed = May 2008
    Current rate = 5.625% 30yr fixed
    Current value = 275-325k--not really sure...was $350k last appraisal in 05/08 but local appraiser says AVM is probably less than 300k. I doubt very much it was ever worth the $350k it appraised for 2yrs ago.
    PI = 1680
    TI = 240
    PMI = 80

    I started my business 04/09 so 2009 expenses were much more than they will be for 2010. If I can do my own P&L for 2010 I can show more net income than my tax returns do and can try to make the figures work if I know what I need to show for income vs expenses...

    Thanks for any suggestions!
  7. lisasxr

    lisasxr LoanSafe Member

    Several factors to consider - is the new payment going to be sustainable long term.

    Your constants - $825 cc/revolving credit debt; $970 childcare (because we are looking long term)

    Starting with the basic HAMP waterfall - your remaining balance of 285K at 2% for 40 yrs (these are the 1st and 2nd step of the waterfall) Gives you a PI payment of $863.05. Add in your TI of $240 for a payment of $1,103.05. (This takes no forebearance into account - because honestly do you want a balloon at the end of 40 yrs)

    To get to the PITI of $1103.05 you need to show income of about $3600.00 personal GROSS per month.

    BUT, you now have to take the personal NET income and subtract your modified payment, cc payments, childcare, utilities, groceries, insurance etc and still have a small surplus each month.

    If your set up as a sole prop - SE tax is approx 15% of gross income.

    $3600.00 personal GROSS income
    $ 540.00 set aside for taxes
    $1103.05 modified mortgage amount
    $825.00 cc/revolving credit
    $970.00 childcare

    These constants don't leave much for food, gas, insurance etc (only about $100 per month)

    Do you have anyone else contributing financially to the household?
  8. missmerryw

    missmerryw LoanSafe Member

    What about omitting the childcare expense (although if they review bank statements there is a $130 weekly deduction that would be definitely be noticeable), or at least reducing to $560/mo? They don't need to know that I'm expecting another child, correct? That could trim a little off what I would need for monthly income, OR create enough of a surplus for utilities and food to qualify??

    Yes, I am a sole prop. The 15% SE tax--do they require that it be added as a monthly expense? For $44,250 in Gross Income and $28,500 in Net Income tax was $4,000. After itemized deductions it ended up being zero for state and federal and I only had to payout $1200 in SS tax. Just thought I'd throw it out there b/c I know there's a magic number that they're looking for as far as surplus so I want to make sure I cover every possible scenario!

    Last, no; no one else contributes to household. Depending on what documentation is required I could possibly come up with something if that would help...

    Thanks so much for the help thus far--and thanks in advance for any more advice you may be able to offer... :)
  9. lisasxr

    lisasxr LoanSafe Member

    My opinion is strictly that, please don't take this negatively as it's only my opinion.

    I don't think they require the SE tax to be an expense, but I tend to err on the side of caution and better to overstate my expenses then to understate them. (The same holds true to me re: childcare. They don't need to know since your not presently paying for it, but you know and you don't want to cut yourself too thin each month (and or default after the mod) due to changes you could foresee.)

    Loan Modification should be used as a long term fix. If you start out claiming only current expenses, (when many expenses will go up shortly) I personally see that as setting myself up for failure - which is what I'm trying to avoid to begin with.

    By increasing your personal gross income it will also increase the HAMP modified loan amount -
    $4000/month = $1,240 (PITI) - $240 (TI)= $1,000 PI available (under HAMP this would cause them to forebear a portion of the principle until the end of the loan)
    $4200/month = $1,302 (PITI) - $240 (TI)= $1,062 PI available (under HAMP this would cause them to forebear a portion of the principle until the end of the loan)

    $4000 (personal gross)
    $1240 (modified payment)
    $825 (credit report loans)
    $970 (childcare)
    Leaves $965 - not accounting for any taxes.

    REMEMBER - that by modifiying your mortgage and reducing your interest rate, your schedule A deduction will also be decreased thus causing your taxable income to be higher. Look at your tax situation based on AGI, deductions, exemptions, taxable income, child tax credit, childcare credit and EIC.

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