Business ownership complicates home loan process
Thinking about buying a house?
Don't call a Realtor, at least not yet. Stop reading the For Sale ads. Hold off on visiting open houses.
Instead, call your banker -- and ask her (or him) to put you in contact with the bank's mortgage loan officer.
That's the advice from David Buckman, and it's especially good advice if you own a business:
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010 to restore some structure to the nation's financial system after a shaky period that many feared was leading to a new Great Recession, changed many financing requirements for lenders -- including the documentation business owners must present to qualify for a home mortgage.
"Dodd-Frank defined for the mortgage industry what borrower data it must verify before granting a residential mortgage to a business owner seeking to buy a home," Buckman explains. Buckman, NMLS #: 755920, is a Sr. Residential Loan Specialist at Naperville Bank & Trust. His primary professional home is Wintrust Mortgage, part of Rosemont-based Wintrust Financial.
For traditional borrowers with a regular paycheck and a Form W-2 (the federally required statement of wages and taxes), meeting a lender's financial requirements is relatively simple -- assuming their finances are in decent shape. Business owners don't have a W-2, however; instead, we have a K-1, which records our share of ownership interest in the business and the dollars we receive as owners.
The K-1 matters. Here's what Buckman suggests to business owner-mortgage hopefuls, to get the process moving:
• "Call me early in the process, the moment you start thinking about a house, so I can analyze your financial data," he says. Even if you're thinking of buying in a year or two, talking to your lender now is a good idea, according to Buckman. Review and analysis take time.
• The first item you'll need are your federal tax returns for the most recent two years, plus K-1s for the same period.
Because the mere thought of digging out tax returns often brings a less-than-positive reaction, "The initial advice I typically give is to call your accounting professional, who almost certainly can send me an e-copy of the forms," Buckman says.
That helps. A phone call to your tax preparer is easy.
• "I need to know where your assets come from, what's behind them," Buckman says. "After I review your assets, I'll be able to give you some advice on your down payment."
Buckman, or bank officers like him, also will want to see two years of your bank statements -- every page. There's more, but it's better if your banker explains the details.
There could be some positive news for business owners seeking a home mortgage: The Self-Employed Mortgage Access Act of 2018, legislation introduced by U.S. Senators Mark Warner, a Virginia Democrat, and Mike Rounds, a South Dakota Republican, is intended to ease the requirements on self-employed individuals.
However, there has been little movement on the legislation.
Oops. My column on business owners and the documentation they often will need to obtain a home mortgage comes with some good news -- but that's because I made a mistake in the original copy.
Wintrust mortgage officer Dave Buckman will not routinely request two years of bank statements as documentation on every loan, he said in a follow-up email to me, " ... only if I was needing to qualify a borrower using an asset depletion or a bank statement loan, due to their tax returns not yielding a sufficient income to qualify for a mortgage."
My error aside, it remains a good idea to make an early call to your banker even if you're just beginning to think about buying a house.