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Financing in Valparaiso : Real Estate Advice

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Tue Mar 26, 2013
Brent Wright answered:
Hello Terry,

I have been self employeed my entire adult life. Right now what the lenders are doing is they're taking your last 2 tax years so right now 2011 & 2012. Add your total gross profits and devide by 2. That is your average #. Then that is what you made year to year. ... more
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Fri Aug 1, 2008
Other/Just Looking answered:
Lending answer:

Under FHA rules, self employed borrowers must provide 2 years of tax returns to demonstrate qualifying income. Bank statements cannot be used to prove income, but are required for qualifying assets. FHA requires just $100 in reserve after cash required to close (statutory down payment is now 3.50%; assets in excess of the minimum can be used as a compensating factor to offset higher debt ratios).

Tim Diersing's 1st answer below is solid - depreciation, depletion, and self-employment tax are examples of "add-backs" to determine qualifying income. I must clarify Tim's second answer somewhat... FHA does have specific debt ratio requirements, but if you have reserves in excess of the minimum, FHA's automated approval software may approve a higher front and back end debt ratio.

Front end debt ratio is the percentage of your qualifying income taken up by mortgage principal, interest, property taxes, and home owner incurance plus association fees if applicable. The ideal ratio cap is 28%.

Back end debt ratio is housing expense as above plus all other debts. The ideal cap is 43%.

I've seen back end ratios approved as high as 55% - but the front end was no higher than 28% - when the borrower had several months' worth of reserves.

Regarding amending tax returns... this topic comes up somewhat more frequently now on lender forums. FHA underwriters will require evidence the amended return has been filed (verified by a lender ordering a transcript of your returns using IRS Form 4506T) plus proof the additional tax obligation has been paid.

Do not amend your return without consulting a CPA first, then you must ensure that your prospective lender will accept the 1040X in place of the 1040 originally filed.
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