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Your Secrets - What You Do May Cost You

For real estate investors, financing can be tricky. Especially when we have unusual jobs or are self-employed. This is an explanation of how you can best structure your loan package for success as an investor.

There are essentially two types of workers. You are either employed by someone and you get a paycheck and a W2 or you are self employed. The definition in lending terms is you are either a W2 wage earner or self employed. When you are a wage earner you can document your income with pay stubs and/or your W2.

When you are self employed it becomes a little more difficult to document your income. If you provide tax returns, often times you do not show enough income to qualify for the loan due to expense write offs, depreciation, etc. To combat this problem, lenders will offer many types of loans with varying documentation requirements. A full doc loan is the least risky and it just means that you can fully document your income with pay stubs and/or W2's. A stated income loan means that you are literally stating an income but that income will not be verified.

As long as the income that you state is in line with the median salary for the occupation you have listed, then you won't raise any eyebrows. Most underwriters will go to salary.com and input the job title to see what the median income is.

For example, let's say that I am a self employed plumber. On my application I state my income as $5000 a month. I then go to salary.com and input the keyword "plumber" with my zip code "80204" and I get the results back. I can choose from an entry level plumber or levels 1, 2 and 3. Let's just select level 2. The income range is $42,985 - $55,621 with the median income of $48,437. I then divide $48,437 by 12 to get my monthly gross income of $4,036. We're about $75 a month higher on our stated income but we should be OK with the underwriter.

The next doc type again in order of least risky to most risky, is no ratio. In this case, we don't state any income at all. We do this to get around the problem of a really high debt to income ratio - more on this in a bit. In both a stated income loan and a no ratio loan your employment will be verified but the actual income will not. In the case of our self employed plumber, he will be required to produce a business license or a letter from his CPA saying that he has been in business for at least two years.

Interestingly enough, many lenders also allow stated income and no ratio loans for W2 wage earners. In this case, your human resources department will verify your employment, job title and start dates but again will not discuss income. The next doc type is a no doc loan. For this loan no employer, job title or income is listed. You literally don't have to document or prove anything.

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