Happy Holidays…Here’s a House for Your Present! (Buying a Home with Little Income)
Many people today make good money; but are self-employed and take advantage of as many write-offs and tax loopholes as they can. They can easily afford a home loan payment, but lending guidelines may not agree. When qualifying for a mortgage, lenders do not look at gross income – even though most consumers do. For example, a Realtor may say “I made $90,000 last year.” and show their income statements supporting that claim.
When a lender looks at their tax returns and digs deeper, they see that a Realtor may write off all their advertising, miles driven when showing properties, sign costs, cell phone bills etc. After all those deductions, the ‘usable’ income is at $50,000 and they cannot qualify for the home they wanted.
So how do they get that home?
There are two scenarios where this works.
1) They are buying an investment home and not a primary residence
2) Someone cosigns or buys the home for them
Cosigning or having someone else purchase the house for them is intuitive and the same as doing the same with a car. Let’s concentrate on the creative option #1.
When purchasing a home as an investment, the down payments are a bit higher and the interest rate is a bit higher…BUT you are able to use 75% of the fair market rent of the home to offset the mortgage payment.
So let’s say they buy a $250,000 home with 20% down. They have a loan amount of $200,000 and a total payment of $1200. The market rent for the area is $1600. Take 75% of the $1600 and subtract that from the mortgage payment. That is $1200 – $1200 = $0. They don’t have to count anything from the home purchase as a debt. They only have to qualify for their current debts!
Here’s a real life example from a couple years ago:
Mrs. Jones and her husband wanted to buy a $350,000 home. Mr. Jones made plenty of money to qualify. Mrs. Jones did part time work at $8.50 per hour; equating to about $1000/month in income. Mr. Jones unfortunately had a Bankruptcy 3 years prior and was not able to be on the loan because of that. They were planning on putting $70,000 down and purchasing the home for Mrs. Jones’ brother to live in. Mrs. Jones had no debt and she and her husband owed their home free and clear. Since they were purchasing for her brother it would be considered an investment property. Taking 75% of the market rent more than covered the mortgage payment leaving Mrs. Jones only having to qualify with the taxes and insurance on her current home. The combined amount was $300/month. Using her $1000/month gave her a debt to income ratio of 33%. She qualified for the home and closed on it 30 days later.
As they say, there’s more than one way to skin a cat. (Which seems like an odd and almost morose expression)
Feel free to contact our team about your specific situation or questions.