Financing in Palo Alto>Question Details

Timothy Chin…, Real Estate Pro in San Francisco, CA

Would being an owner of a corporation (small business) affect my ability to get a mortgage?

Asked by Timothy Chingos, San Francisco, CA Tue Mar 1, 2011

If I start a small business and incorporate, will their be any financial or legal ramifications that would affect my ability to get a loan? Put another way, will my lender look at me separate of my corporation? Will my stake int he company be taken into account when I get pre-qualified? Thanks for the advice.

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Is this business in addition to whatever job you already have? If you are maintaining another job then it could be relatively minimal unless you have a lot of start up costs.

It is good you are checking about this BEFORE. Good question.

Pat Chadwell
Realty World - Residential Specialists
http://www.patchadwell.com
1 vote Thank Flag Link Wed Mar 2, 2011
Tim,

You shouldn't have any problems. There are also several portfolio lenders with niche products for folks in your situation should you run into issues with FannieMae / Freddie Mac or FHA / VA underwriting.

Also, most folks think they need to get Inc'ed to protect themselves when insurance may be cheaper in the long run. Also, when it comes to financing for your business, most banks will require personal guarantees.

Happy funding, Rudi
Web Reference: http://www.umboc.com
0 votes Thank Flag Link Wed Mar 2, 2011
Yes, any conventional lender will require the business returns and look at the income or loss generated to calculate your monthly income amount for qualification. There are some portfolio lenders depending on Credit, Loan amount that won't use the income from your corporate tax returns. However, it is best to let a mortgage pro like myself evaluate the tax returns and see if the income amount would impact the qualification for the mortgage amount you looking to finance.
0 votes Thank Flag Link Wed Mar 2, 2011
Ok, if you own more than 25% they will usually want a P & L to see if you are operatiing at a loss, but they would not use your income for qualifying purposes.

It shouldn't harm your ability to close, but you want to address it in your application so you can accurately source deposits (your own payments to yourself) that come from your business into your personal account.

Otherwise you should be fine in terms of getting financed
0 votes Thank Flag Link Wed Mar 2, 2011
Just to clarify a few things:

1) This would be an S-Corp.
2) The corporation would be in addition to my full time job.
3) For the first year or two (the time period when I'd be looking to buy a home), I would be investing more in the business than I would be making, but not to the point where I would be in debt. Any moneys invested would come from savings.

Thanks for all of the help so far!
0 votes Thank Flag Link Wed Mar 2, 2011
Hi Timothy and thanks for your post.

First, there is no advice like professional advice, and the questions you are asking should be posed to two professionals for the best information--your corporate attorney and your CPA.

As you probably already know, there are basically two types of corporations for tax purposes--a "C" Corporation and an "S" or "Subchapter S" corporation. Most small businesses choosing a corporate form, choose the Subchapter S version, which provides a corporate "shield" while allowing profits to pass through to the owner or owners (shareholders) of the firm. Larger companies or those expecting to have more shareholders than are allowed under the Subchapter S format will choose the Corporate "C" route, which does NOT allow for profits to pass through to the owners without distributions to shareholders, which distributions are taxable events.

If your business is a Subchapter S corporation, then the lender is likely NOT to separate you from your corporation and will look to the corporation as a part of your income stream. After all, the Subchapter S corporation's profit pass directly to you as the owner.

If your business is a C corporation, however, because you will need to be paid like an "employee" with a W-2 rather than paid profits from the corporation as a "pass through" as would be the case in the Subchapter S corporation, you'd be separate from the corporation--much as if you worked for any large corporation as an employee. The stocks you won in the corporation would be valued based on the net worth of the company divided by the number of outstanding shares x the number of shares you own.

Again, however, check with your CPA and your corporate attorney for more assistance and for the best information regarding your particular situation. The information above is intended as "general" information and is not intended as legal opinions or accounting advice.

Good luck!!

Sincerely,
Grace Morioka
Area Pro Realty-People's Choice
San Jose, CA
0 votes Thank Flag Link Wed Mar 2, 2011
1) It needs to be two years unless you have income from other sources

2) You will also have to provide two years corporate tax returns as well as personal returns
0 votes Thank Flag Link Tue Mar 1, 2011
Hi Timothy,

Starting a business and incorporating will not preclude getting a home loan.

You want to get good legal guidance with regard to incorporating and you also want an expert loan consultant who can help you navigate the financing process.

If you'd like to get my personal recommendation for someone local, feel free to drop me a line.

Regards,
Dan

Daniel Berman
Pacific Century Realty (Palo Alto)
Buyer Rebates to 50%
Listing Commissions as Low as 1%
0 votes Thank Flag Link Tue Mar 1, 2011
Hello Timothy,

The impact of owning a business, especially if you own over 25% of the corporation would affect getting a mortgage. If the corporation is losing money on the taxes, this will reduce your overall income.

If the corporation breaks even, and there is no loss or gain(income) needed from the corporation to qualify, then there is no real impact.

The legal ramifications are limited and fall under the corporate umbrella as long as you have no personal guarantees to any debt or leases that are in the corporations name.

I recommend a conversation with the attorney who sets up the corporation with the state for more specifics.

I am happy to discuss this in more detail if you need more info.

Best,

Eric Nelson, III
Sr. Mortgage Planner
SVC Funding
408-268-2442
DRE #01258488
NMLS #120412
eric@svcfunding.com
0 votes Thank Flag Link Tue Mar 1, 2011
Hello Timothy,
I have a lender who could go into great detail and point you in the right direction. We work closely together and I refer all of my clients to him. His name is Scott Stinson with FBC Mortgage. They do in house lending and deal with wholesale loans giving a buyer more options. Scott's email is Loans@ScottAlanStinson.com
His phone number is 407-872-3383 and his website is http://www.ScottAlanStinson.com . Give him a call or send him and email. You will get the answers you are looking for and have a trust worthy broker to confide in. They are rare these days. Good Luck

Jennifer Hernann
Re/Max Prestige of West Palm Beach
http://www.SellingPalmBeaches.com
JenniferHernann@remax.net
0 votes Thank Flag Link Tue Mar 1, 2011
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