Small Business and Full-Time

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  • #39126
    mademoiselle
    Member

    Hi all! I’ve been searching for more info on small business requirements. I have a full-time and a small business. And I realize there will be lots of hoops to jump through. I’m a week away from my intake session and want my ducks in a row.

    Is there anyone who can share their process in dealing with both. The types of business paperwork required. Is it just all the requirements of self-employment? Will my small business income be calculated by 2 years tax returns or by profit/loss? Appreciate the dialogue!

    #39133
    pratik
    Member

    @mademoiselle, try to keep it simple. Don’t overwhelm your counsellor – they are not all the same. Since you are an entrepreneur, you would need to show monthly bank statements of past 12 months or more. This is to calculate your monthly income as your qualified mortgage will be capped at 31% of your (average) monthly income or your current rent/mortgage+payment shock, whichever is lower. Tax returns are typically used to determine your yearly income to decide on if you are targeted member or not (which may lift off regional maximum purchase price limits, but doesn’t matter if you are buying in targeted area). Hope this helps – best wishes and keep the dialogue going if needed!

    #39138
    mademoiselle
    Member

    @pratik -Honestly every bit of knowledge and support helps. So, thanks for your response. I am hoping that between my full-time and small business I will be able to qualify for something reasonable in the Washington area. Which seems like an impossible feat alone. I am not certain that either income stream on its own would allow me to get into a property in the city, so I hope this will work out. I have had my small biz for 5 years and don’t plan on shifting to just one stream of income any time soon.

    I already have my tax preparer on deck so when I leave my Intake meeting, she can help me prepare whatever documentation the MC requests.

    Overall I’m just excited about my meeting since I went to my homebuying course in July. But these months have allowed me to save a lot and prepare for payment shock.

    Would love to hear from other entrepreneurs

    #39139
    pratik
    Member

    @mademoiselle, why are you waiting for so long between your workshop and intake? If you are running a business for 5 years in any power, I am pretty confident you can put together the paperwork required by your MC in a weekend/couple days. 5 months of saving would not help as they would want to look at 12 months and if MC wants to be picky, s/he will say that the minimum saving in last 12 months might be the number you want to go with (however, mostly they understand that business has ups and downs and they will average over past 12 months). As far as affordability goes, it is a simple calculation with following steps:
    1. Find a house that has your ballpark preferences on zillow or something (assuming you are a non-target member, if the house price is higher than the regional purchase limit, look for targeted areas so that there is no cap on purchase price!)
    2. Find the ballpark purchase price of that house, along with taxes, insurance from public sources
    3. Use any mortgage calculator and punch in the above numbers with NACA’s current interest rate and see the monthly mortgage it comes up with
    4. Is this monthly mortgage less than 31% of your average monthly income?
    5. Are you saving enough to meet the payment shock for this monthly mortgage?
    6. If not, would lowering interest rate to almost zero (buydown option) brings it under your affordability?
    7. I highly recommend 15 year mortgage because of lower interest rate and superior buydown. However, only if that is not possible, you can consider 30 year mortgage.

    You can wait for other entrepreneurs to chime in or just get on this action plan and stop throwing away money in rents sooner than later! Best wishes to you!!!

    #39152
    mademoiselle
    Member

    @pratik —Thanks for this action plan. Trust me, I needed to wait (it was more like 3 months July 25 to Nov 1) to get it together. But I certainly want to move full steam now and quit lining someone else’s pockets.

    I would love to do a 15 year, but not sure if that is in the cards for me at this time. So impressive how you were able to buy all the way down. But I’m not going to write off that possibility yet.

    I will be sure to keep everyone posted on how my intake meeting goes next week!

    #39153
    pratik
    Member

    Buying down is typically not an issue, affordability (can you pay monthly mortgage? based on evidence of monthly income, payment shock) is. If you can afford 15-year mortgage after buying all the way down, that I would say is the way to go. Actually my builder offered 15k back, and I had a freedom to use it as a discounted price, towards closing costs or towards buydown. On a 250k property, this amounts to 6 points. On 30 year mortgage, you can buy down 1.5% (0.25%/point), but on 15 year mortgage, you can buy down whooping 3% (0.5%/point)!! When I closed, I think the interest rates were 3.5% on 30-year and 2.875% on 15-year, so I used 1k towards discount and 14k towards buying down, added 500 bucks and got the 0.0625%. I could do it because of my very recent salary bump which led to affordability (31% of monthly salary) – I didn’t have issues with payment shock, as I have been consistently saving enough. Should I have gone with 30 years, my monthly mortgage would have been ~1200 for 30 years (~2% interest rate), versus ~1600 for 15 years (0.0625% interest rate). The choice was obvious for me! If you don’t have much seller contribution, you should “borrow” from family/friends as “gifts” to repay them in 2-5 years. Buyers are limited to 7 points (unless you are a targeted, where the bank matches your buydown above 7%), but sellers can go up to 10 points towards buydown. You should use this to leverage your position. For example, if house is priced higher than asking price during assessment, you can ask your seller to do contract at that higher price and help you with closing costs for the difference.

    Run the numbers before you make up your mind if that is in the cards for you! You would be surprised!!!

    #39158
    TTrumble
    Member

    Hello mademoiselle,

    Pratik’s advice is (as usual) right on the mark, and there isn’t really much to add.

    Don’t let yourself get stressed out over the small business. Just commit yourself to going in over-prepared. 12 months of bank statements, P&L statements, business tax returns (if any) and so on. I always preach that it’s better to have twenty pages too many than one too few.

    About half of our members are actually in a good position to take advantage of the 15-year loan. It is an incredible product. Another Forum member, rashad3000, used the 15-year and bought the interest rate all the way down. The most interest he has paid any given month was on his first mortgage payment (as is normal), and that was a whopping $22! He pays so little interest that he actually posts his annual interest statement from the bank on his Facebook page!

    I’m glad you have become a part of the Forum family. Please stay with us and share your journey. We’ll also be here to help when you hit the eventual stumbling block that nearly everyone comes across during the process. And thank you to Pratik for staying active here after closing on your home to share your experience and knowledge.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #39164
    pratik
    Member

    Of course @TTrumble! NACA is an awesome program which is hard to grasp for the most of us. Trying my level best by aggressively pushing members to make one of the best decisions of their lives!

    #39264
    mademoiselle
    Member

    S​o after months of anticipation, I had my First Intake meeting. DC has a beautiful new office near Silver Spring. My appt started right on time. It was shorter than expected, but that may be because I had my documents in order. My counselor seemed pretty no-nonsense and I appreciated that. We went over my credit report and I was told of several instances where I will need to write LOEs. The least of my worries (hopefully).

    Ultimately, we realized I will qualify for the max with my 9-5 alone and without my small business income. So that will actually relieve me of a LOT of extra paperwork hurdles. ​

    I do have a bit of sitting and waiting to do now since I will need to show payment shock for 6 months. I was told this is because my Payment Shock is over $300. That’s fine, I have 3 months down already, and 3 months to go. I was a bit heartbroken to know I will have to wait until early February for my next meeting, but that just means more money in the bank.

    As I shared with my MC, I want to do this right. So if it take a little more time, that’s fine.


    @ttrumble
    and @pratik Thank you for the words of wisdom, they helped me to go in very open minded and relaxed!

    #39271
    TTrumble
    Member

    Hello mademoiselle,

    I’m happy we were able to help. Please keep us updated!

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #39279
    pratik
    Member

    @mademoiselle,

    Glad to be of help. To reiterate, please know that higher income + higher savings = higher qualification amount (capped at 31% of monthly income, obviously). This means, for the same house you could’ve bought on 30 year mortgage, you might get qualified for 15 year mortgage. This means, better buydown options (0.25%/point in 30 years vs 0.5%/point in 15 years). This means, more money towards principal rather than “throw away” in interest payments.

    Consider this scenario:

    200k house, 50/mo HOA, 100/mo taxes, 100/mo insurance (all made up).

    For 30 years at 3.5%, you would have monthly mortgage of 900+250=1150. Of this 950, you will be giving 315 in your principal and 585 in interest. In the first year, you will have paid ~7000 in interest and in first five years, ~33000 in interest.

    For 15 years at 0.0625%, by paying 13750 buydown amount (assuming 3% rate for 15 year mortgage, by paying precisely 6.875 points, paid by you or the seller), your mortgage will be 1116+250=1366. Of this 1116, you will be giving (whooping) 1106 in principal and (your lunch’s worth) 10 in interest. In the first year, you will have paid ~121 in interest and in first five years, ~523 in interest (probably less than the price of your mattress!)

    The difference in above two scenarios is $166/month with $13,750 buydown amount (which be borne from seller, your family/friends as one-time gift) and a near-luxury car’s worth (or 4 used cars’ worth) of savings in just 5 years. While identifying sources of buydown is easy, bridging the gap of $166 may be difficult. Therefore, I insist you do your homework and even add your freelance income if needed towards superior financial freedom!

    Cheers,
    P.

    #39291

    Hi folks,

    Can someone explain exactly what the profit and loss statement should look like for self-employed income?

    Here’s what we’ve done:

    — 12 months bank statements with “BD” (business deposits) and “BE” (business expenses) marked in our (unfortunately) 3 self-employment-related accounts each month
    — a single Word Doc that lists Income and Expenses by account with monthly combined totals

    Should we break this Profit and Loss into multiple documents with a document for each month and each account?

    We actually have a meeting in 3 hours with our counselor, and we surely won’t get through everything today, but since we have to wait 2-3 months between meetings at our busy office, any last-minute prep we could do might save us some time in the long run.

    (I am envious of those of you who can return 2 weeks later and get qualified so quickly, but I am grateful that we’ve had more time to save for the buy down.)

    Thank you very much!

    #39293
    pratik
    Member

    Sorry for the late reply, @homesweetboston, but I think the bottom line is this: whether the monthly net influx in ALL your bank accounts combined over past 12 months is more than or equal to the payment shock. It can’t get any simpler than this. From my experience, the counsellors won’t accept any excel sheet or word document (which is understood, because all members have varying skill of making it clear) and rather feed in the bank account statements in their system.

    No matter how busy the office is, if you think you are ready, you should call the receptionist weekly/biweekly (or even daily if it is not too much), ask for any cancelled appointments and ask if you can fill that empty spot. It surely worked for me when the delays were 3+ months and I rammed through my qualification while many others waited for their scheduled appointments and reappointments, in spite of them being more than ready, resulting in delaying their home-ownership by months to a year.

    No need to be envious of those who get qualified so quickly. Be inspired and learn how they did it and see if you can replicate it, which I am positive you can.

    No need to save for the buy down if that is the only thing keeping you from home ownership, as there is enough buy down money among family and friends to borrow and pay back on monthly basis. This you can “borrow” as “one-time gifts”, and typically since the money is coming from inner circles it is typically 0%, and if you have a discipline, you will literally payback the difference between current 3.5% (or whatever) and your with-buy-down-0% rate mortgage amount and re-pay all the money within 5 years (30-year mortgage) or 2.5 years (15-year mortgage). I strongly advocate for 0.125% (BoA) or 0.0625% (Citi) – I fall in the latter as you might have figured and I can’t be thankful enough to NACA for such an awesome deal!

    Best,
    Pratik

    #39299
    mademoiselle
    Member

    Hello @homesweetboston ! We would love to hear about how things went for your intake and what requirements there were for your P&L sheets for your self-employment. At least for me, this has been one of the more mystifibg topics on here which is why I started the thread. Can’t wait to hear from you!

    #39302
    TTrumble
    Member

    Hello homesweetboston and madamoiselle,

    I think I have a P&L template that you can use, but I need to do some digging for it as I haven’t been asked for it in quite a long time. Email me and once I find it I’ll get it to you.

    However, as long as it matches your bank statements, pretty much any P&L statement form will work. If you use Quickbooks or any similar accounting software, the statement it generates should be fine. Again, the important thing is that you can back it up with your bank statements.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

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