Welcome back to another episode with Kyle Seagraves, Certified Mortgage Advisor, Licensed Loan Originator, and full-time home loan educator. In previous episodes we’ve talked about the logistics of buying a home, so in this episode we will go through some strategy tips and common worst-case scenarios.

• How long you’ll need to stay in a home for the appreciation value to catch back up if the market slips
• What to do if you have to move but can’t sell your house yet
• How much of an emergency fund to save up first
• Self-employed income versus W2 income for getting approved
• Tax reduction strategies and how they affect the ability to get approvals

It can all feel very overwhelming because it is complex, but sometimes in our minds we can overcomplicate things. Start with a conversation with a loan officer first, then make a plan instead of trying to figure it all out yourself.

Connect with Kyle:

Purchase Price Calculator: https://www.winthehouseyoulove.com/max-purchase-price-calculator

LoanClarity Advisor: https://www.winthehouseyoulove.com/advisor

On YouTube: https://www.youtube.com/c/WinTheHouseYouLove

Online: https://www.winthehouseyoulove.com/

We cover ALL of this in the “Get Your Finance Sh*t Together” self-study course at confidentmoneypodcast.com!

Now Open: Money Mavens group coaching program! There’s a special prize for anyone who signs up in the first week at confidentmoneypodcast.com.

Enter to win a free strategy session with me!  Leave a 5-star review and include your IG handle to enter. We draw the winner at the beginning of each month. 

FTC/Affiliate Disclaimer: By using some of these links, at no extra cost to you, I may earn a small commission or referral fee, which helps me continue to produce content like this, support my business, and my team.

DISCLAIMER: I am not a financial advisor and this is not financial advice. My podcast is for educational purposes and is my personal opinion only. To make the best financial decision for your situation, please do your own research and if needed, seek the advice of a fee-based, fiduciary.

Music credit: Neon Fairies by Wolves 

A Podcast Launch Bestie production

Welcome back to the confident money podcast.

I'm your host, Caitlin Magnuson.

And this is episode five with our guest Kyle Seagraves.

Kyle is a certified mortgage advisor, licensed loan originator,

and the owner of win the house.

You love a YouTube channel with over a hundred thousand subscribers.

Kyle, I feel like you don't even need to be welcomed back at this point.

You're just existing as a part of the show.

Um, so thank you for being here.

And I know today.

We were gonna talk about the, you know, strategy around

buying and selling a house.

And we're also going to touch on some self-employed tips because I know a lot

of our listeners are self-employed or looking to be self-employed in the future.

So welcome back.

Let's kick it off.

Yeah.

I feel like if I wasn't welcome at this point, we probably

wouldn't have this many episodes.

Fair.

um, yeah.

You know, I, when people are buying a house like they're spending.

More money than they ever have before.

And of course, that's going to, that's gonna trigger that thing in our brain.

That's like, um, what are all of the risks?

And I need to make sure I have answers to all these things

before I move forward with this.

Otherwise, that very primal part of us is gonna like back out, go

back to the thing that we know.

Um, and so.

I think that's kind of our goal for this episode is to just really touch on

what are some of those things that get triggered in us that make us well and say,

actually, I wanna go back to the thing that felt more safe and secure because

I, the more familiar with it when we get into the unknowns, we start to say, uh,

get me outta here as quickly as possible.

Um,

Yes.

and I know we touch on a couple of those things like the

30 year versus the 15 year, um, along with, uh, also some of the renting.

Versus buying questions.

The duration that you're gonna be staying somewhere.

I mean, that kind of went with the renting versus the buying, but I know that the big

one had been the, you know, opportunity cost of, okay, so you've bought,

but maybe the market has fluctuated.

You know, what, what does that look like when the market fluctuates?

We've seen an appreciating market for quite some time now.

And so if you buy in, there's a very good chance you're gonna be selling for

higher than you've purchased, but with, you know, the market changing, what does

that look like if you buy in and you need to sell two years from now, but

your home's actually valued at less.

Yes.

That is a huge concern, especially with a market that we're in now, where we're

growing from seller's market, where sellers have the control prices are higher

into what looks like more of a buyer's market now where buyers have control

over terms, um, and negotiating power.

And usually prices tend to.

Flatten out a little bit and potentially decline.

Um, first I think it's really helpful to remember why do I wanna

buy a home in the first place?

for most people they're buying a home because they want

to enjoy where they live.

They wanna have a nice place to either work or to sleep or, uh, to

cook meals and have friends over, uh, not to squeeze the most profit out.

And I, I don't believe that every single thing we do in life has

to be squeezing every single.

Out of all of our decisions.

And so home buying can be something that you spend money on, uh,

or lose money on and it'd still be fine because you enjoyed it.

Cuz that's kind of what life is about is actually enjoying things, right.

and not just, uh, you know, being a machine for money.

So it's okay.

If everything we do, doesn't like ultimately, uh, bring,

create the most profit for us.

If you are looking in a house like in a market like this, and let's

say we bought a home for $400,000 and what happens if we see prices

decrease over the next few years?

Well, our really good thing to do is look at what's happened historically

when there's been price declines, historically, uh, the past few declines

that we've had have only lasted three years, meaning that if you bought a

home and waited three years before you sold it, you would've broke.

That's not a terribly long time to wait in home.

Even in the biggest decline when we had the 2008 housing crisis, that

was a decline of six years before it were covered back to the same period.

So if you bought a home for $400,000 at the height of, uh, home prices,

uh, right before the housing crash, let's say we bought it for 400,000.

If you waited six years in that home and then sold it, that you would've

been able to sell it for $400,000.

so you didn't lose any money unless you sold at the decline.

Um, now if you do sell a home, uh, within a short period of time, this is where

home buying, uh, does have like a lack of flexibility to it compared to renting.

Because with renting, I can tell my landlord and say, Hey, I'm

actually gonna be leaving in 30 days.

Best of luck.

uh, or 60 days or whatever they want from you.

Um, before you leave and then you go somewhere.

With the buying, you do have to put it on the market and sell it or rent it.

Um, and if you are selling within a short period of time, you do run the risk of.

Either breaking even, or actually having to bring money to the

closing table to sell the home.

And this would happen if you, uh, let's say we bought the home for

$400,000 and in two years we wanna sell it and maybe we can only sell

the home for, uh, let's say $405,000.

So went up in value a little bit.

But when you close on a home, you also pay closing costs.

Most of the time people pay 6% for both their realtor and

the buyer's realtor combined.

So 3% for each, and then there might be some property taxes or some

other closing costs like title or transfer taxes when you sell the home.

And so in those instances, it's possible that if you need to sell home within

a short period of time, that you could have to bring money to the closing.

That risk becomes less and less as you stay in the home for longer.

And like we talked about on a previous episode, that's why it's

usually beneficial to buy a home.

Only if you know, you're gonna stay in there for three plus five plus

years because you don't run that risk anymore of, uh, the appreciation,

not covering the cost to sell.

Yeah, I think that that's something that can

be really scary for people.

I know that's something that I bought right after, you know,

the 2008 collapse we'll say.

And it was really, there was a lot going on at the time where,

you know, people were selling or people were underwater and.

You know, we'll, we'll talk about this more in the next episode, but

I also, I want people to understand that, Hey, if you're going into

this understanding that yes.

You know, it's, it's a purchase, it's an investment.

There is risk associated, right?

Just like with buying a car, doing anything else.

It's just a little bit larger and.

But it can also be really, I feel like very secure if you know, that

you're able to stay somewhere or maybe instead of like, let's say given that

example, and I know that this has happened a lot, especially with the

prior, you know, housing market issues that had occurred, people that were,

you know, underwater on their homes, meaning they owed more than it was

worth, or maybe even they didn't owe.

They were able to sell for more, but with closing costs, with everything that goes

into that, they were going to need to bring cash to closing, which they may not

have because they may have been counting on that sale and the equity that they

had built and the appreciation that was.

To provide them with the profit that they needed.

So just because I know a lot of people here can think worst case

scenario, or like you said, kind of wanna know all the answers.

You know, one of the options that I had been made aware of is looking

at, you know, renting your home or what can you do if you had to leave?

And it was short and maybe even, and I know that this has happened,

maybe even you can't rent your house for what your mortgage payment is.

Maybe you're a couple hundred dollars a month shy.

But you're looking again at the financial cost of is having to bring a couple

hundred dollars to the table to, you know, keep this mortgage here and to keep

this home Intel values appreciate again, or the market has a chance to recover.

So I just didn't know if you had any other thoughts on, you know, options

that people have when they are looking at the worst case scenario, not to

dwell there, but just to provide.

Yeah, renting is probably the best solution in that instance,

if you're like, I am, I wanna sell, but selling is going to cost me money.

Um, you could also looking at doing a, for sale by owner.

Um, there's tons of YouTube videos and solutions to that.

if you need help doing that, because that could save you some money at the

closing table, but if you're at that point where you're like, I need to sell.

I'm gonna have to bring money to the closing table because the

value decreased or the costs for, to close are higher than, uh, you

know, what I made on the home.

Um, then I think renting is really the best option.

especially like you mentioned, even if, even if you collect less

rent than the mortgage payment.

Likely is probably a better option than having to pay money to sell the home.

Um, so options like that, but a lot of it too, a lot of this risk management goes

back to when we bought in the first place.

Um, kind of going back to those conversations about like the 30

year versus the 15, this is why the 30 year is better because in

those instances I'd rather have that lower mortgage payment than the 15.

Because I'm legal, like I'm obligated to the, that higher payment on a 15 year.

So not only that, but I also wanna make sure that when I buy a home, I'm not

maxing out as much as I possibly can.

Um, you know, I don't want to spend 45% just because a lender

will approve me up to that.

I don't wanna spend 45% of my gross income on a home because things.

Can and will happen.

Crazy things like a global pandemic might happen.

And I don't wanna be stuck with a payment that feels like it is consuming

most of my income, especially if things start to get tight economically,

Absolutely.

I could not agree more.

And I think that whenever possible my parents lived this way and like

blessed them because I bought a house three quarters of mile down

the road and it was not possible.

Um, but I grew up.

Being told that you should be able to pay for everything on one spouse's

income, if you were part of a married or, you know, partnered couple.

And I think that that was a great concept, especially for when they were buying.

But they bought a house that was twice the size of mine, three quarters of a mile

away, 12 years before I bought my house and they paid a thousand dollars less.

And I always, that was a whole lot of unpacking around my own buying power.

But when I was looking to purchase.

You know, the house that I had bought before, for me, it was looking at,

okay, what happens if I lose my job?

And I have unemployment unemployment, doesn't cover a lot, but most likely,

you know, kind of running through the different scenarios of what's likely.

And we do this with business owners a lot where, okay.

Let's, let's sit and think about this for a second.

When you're looking at the bills and what, what debt you are comfortable bringing

on, what is the likelihood, if you lost.

Three of your big clients tomorrow, or a large chunk of your income.

What does that look like?

What is the timeline to replace that income?

How easily can you pivot?

What are your options in the market that you're in?

And I think factoring those in with also, ideally not hitting that 45%,

or I think you said before, what?

56.9, 9% for, for some options, which we don't want.

That's really stressful.

Or could be really stressful.

I think that looking at your earning potential and your sort of recovery

potential is important as well, especially when you're considering an emergency

fund or those expenses that pop up, like you'd said before having to replace a

roof or things that homeowner's insurance doesn't cover or making sure that your

homeowner's insurance deductible is realistic for your financial situation.

Are you putting, you know, a $5,000 deductible when you don't

have $5,000 earmarked in savings that could go towards that.

Like there are things to be looking at, and maybe that means if you

have more volatile income or you have fewer income sources that you

save up a larger emergency fund before you look to buy a house.

Yeah.

Yeah.

I, I think you're spot on with the emergency fund is like, I know that

gets talked about a lot in personal finance and I, feel like people

kind of gloss over it a little bit.

and it's kind of really distressing to see sometimes when, like, I I've done

loans for a lot of people who they will buy a home, but the, the amount that

they spend on down payment, closing costs clear out their bank account.

Like they don't have money left over after.

Like they'll literally depend on the next paycheck to come in to

fill their bank account with just something other than like 12 bucks.

Uh, and so like, and I usually tell 'em like, this is maybe it'd be helpful to

have some savings before you do this.

Ultimately, it's not my decision.

You're the one buying the house.

You are a grown adult.

You can make these decisions, but I do wanna let you know,

like, this is, this is risky.

Like, and I don't want you to have to depend on a credit

card or other lines of credit.

To cover things like the AC going out or even just the general cost of moving

tends to be a lot more than people expect.

Um, I was curious, what, what do you feel like is a good, like,

could you explain the emerge?

Like how would somebody set up an emergency fund, and how they figure out

like how much money they actually need

That God, that is, that is the question that's like,

what kind of loan do you wanna get?

Right.

Um, there, there are so many variables that factor in, but I feel really

strongly that as a bare bones rule of thumb, everyone should strive

for three months of expenses.

In an emergency fund.

So let's say you make $6,000 a month as a household and your expenses are $3,500.

You'd want to have three months of those expenses, which is what I think, $10,500.

it's not invested.

It's not, you know, volatile.

This is stable.

And the reason.

Mm.

I air kind of on the low side for liquid cash savings,

because frankly there's an opportunity cost to parking that money in a savings

account, even to parking that money in a high yield savings account.

Part of.

The downfall of keeping that money safe is understanding

that it's also not necessarily going to keep up with inflation.

It's most likely not at all, going to keep up with inflation so that

money becomes worth less every year, which is a little bit depressing,

but you need it to be stable.

You need it to be there.

Now, the reason that I feel comfortable starting at that three month mark

is because for most people, let's say that you know, that household

and that example that makes $6,000 someone in that household gets laid.

Okay, so we're gonna say the income is half.

So your income is $3,000.

Your expenses are $3,500.

So you're only negative $500 a month.

At that point, that emergency fund is going to cover you for almost two

years, given that example, and that's not even factoring in unemployment.

However, for most of us, if you take your base expenses, a lot of

us have things that we could cut.

If push came to.

right.

So taking your regular expenses now and planning for that means that

like I could go cut probably $250 easily out of just random things

that I spend or subscriptions that I have that I don't have to have.

If you know, I'm really tight financially.

Now there are people that may have, I don't know my thoughts on this.

I don't have children.

I have a separate emergency fund for my animals for.

Fed appointments for ACL tears, which we just experienced and get to pay for

again, um, that is separate from that.

I have, you know, this, this amount that I have for my emergency fund

is just for replacing my income.

It's not to supplement, you know, this is not a travel fund.

This is not anything else.

And for me, three months feels great because months really could be six to

12 or more when I think appropriately.

Spread out or allocated.

Now there are some people, maybe you are the only source of income in your family.

Maybe you don't have a partner, maybe you have children and you

don't have a partner that may look like a higher amount for you, right?

Because you have higher risk to your income.

And especially if you only have one income source, you know, for people

that have day jobs, that sounds great.

And for a lot of people, it feels really stable.

personally, I disagree because I've never gonna knock on wood.

Had all of my business income drop out from you overnight.

I have been laid off before and lost that entire source of income.

And so, again, depending on your personal risk tolerance and your financial

situation, I think three months of expenses is a, is a great place to start.

I wouldn't go higher than that.

I would invest any extra for myself personally, above and beyond that.

But for some people maybe as much as six months worth of income could make.

Right,

Yeah, that's.

Absolutely.

What I recommend too is like three months is the fear part of my

brain is like, that's not enough.

I need two years worth.

But three months is like, you'll you have a lot of that's

three years of zero income.

You now have a fund that is replacing, it's gonna pay for all your expenses.

So in that, in that world, you're kinda like, oh, I, I guess I could

take the first month as a break.

And then I have two months to find some other way to just pay for my expenses.

Odds are probably probably be able to figure that out pretty quickly.

And so what it looks like when you're buying a house and reducing some of this,

the risk of things that could happen.

Includes when you're looking at how much the home's gonna cost, making

sure that after you pay the cash to close amount, which is your down

payment, plus your closing costs.

After I pay the cash to close at minimum, I have three months worth

of expenses left over, uh, set aside just as an emergency fund.

Not as am I moving costs, not as furniture, not as

like the ping pong table.

I wanna put in the

Right.

All the fun things.

yeah, just to say, this is.

Worst case scenario

Absolutely.

And I think that that was, I'm not gonna call it a mistake, but I am going to call

it a major stressor when I bought my first house versus the situation and the lack

of anxiety when I bought my second house and I had that fully funded emergency,

you know, savings account and it was.

Buying a house can be stressful depending on who you are and how you operate.

that took one of the really big stressors out of the picture for me and allowed

us to weather unexpected expenses in the first couple of years and not have to

panic about them, or wonder how we're going to pay for them or dip into other

savings or retirement or things that you know, we're ideally not touching.

Yeah, absolutely.

So.

I wanna move into the self-employed side of this, because I know a lot of

people are really curious and I'm always interested when we're chatting about this.

And, you know, a lot of people have been buying over the last few years.

At least a lot of our clients have been.

And so when it comes to being a self-employed person,

qualifying for a mortgage.

one of my biggest tips, and I think you share this, Kyle is if

you have a W2 a day job, right?

Some of your income's coming from that.

A lot of us, I think that started businesses were working W2 jobs

for quite a while, while we were getting our businesses going, my

biggest tip, and this feels like such a cop out is to keep that W2.

Especially if your business is not terribly established until you

qualify and can close on a house because it'll make the process so much

Oh my, yeah, for some reason.

And, and I agree with you.

Like most people have never had their self-employed business.

Like all their income just drop out, but plenty of people have been laid out from a

job and their income disappears like that.

So it's very confusing.

How in the mortgage world w two income is seen as extremely stable.

Underwriters love it.

There's a few, very few pieces of documentation that they need to

prove that income and everyone's comfortable with it being stable.

On the other side, self-employment income is not seen as stable and they want a

longer term history of seeing it income at a very stable level to be able to use it.

Um, so the minimum there is two years.

That's like just two years of being self-employed before they even willin.

You getting a mortgage.

so if you do have a W2 job and you're saying I'm eventually wanting to go

full-time into my business, if you're at that point, it's so much easier to

buy a house, with your W2 job than to switch becoming self-employed often

what I see happens is people will jump into their new business full time

because they're in that point where they're like financially, they're

able to do that and that's fantastic.

But then they say, I want also buy a house.

Okay.

Well, the minimum to buy house is two years of being in business.

Self-employed the only way around that.

Is if you have prior work history.

So the way this would work is let's say you're a graphic

designer and you earn a W2 income.

So you've been doing that for a couple years.

Great.

Then all of a sudden you switch over into, uh, 10 99 work, and now

you're a freelance graphic designer.

You have your own business and you're making maybe a similar amount

or maybe more income, and you have done that for one year minimum.

You can then get past the two year mark because you were a graphic designer before

and now you're still a graphic designer.

You just went from w two to 10 99.

However, if you completely shift, let's say you're a graphic designer,

w two, and then you all of a sudden you started a lawn care business and

you've been doing that for a year.

You can't use that income cuz an underwriter's gonna look at that.

And you've been, you've been in business for one.

How do we know that that is stable and to an underwriter and to lenders, they

view, the company as being more stable than the individual earning the money.

So that's why with the w two, they kind of imagine they almost like assume that the

business you work for is extremely stable.

When most people kind of know that's usually not true.

uh, but when you start your own business, they're like, oh, this is a new business.

We don't know if this is gonna make money.

You know, a long period of time.

And the underwriter's job is to make sure that the income they approve you

with now has a likelihood of continuing

Mm-hmm

Cause if you're getting a 30 year mortgage, they're not anticipating

what your job is gonna be in 30 years.

Uh, but what they like to see is will your income likely continue for the

next three years is what mortgage underwriters are usually looking for.

It's a continuance of three years.

So a business that only started for one year, like statistically, it's

not gonna continue for the next three.

They need a two year minimum self-employed history.

So once you have the history requirement, then figuring out what income they're

gonna be using is a completely different scenario because your first

year let's say your business only made 30,000 and then the next year

let's say your business made 150,000.

A lot of people are like, great.

I I've been making a, a ton of money.

We can now use, you know, 10 or $11,000 per month as what

I can qualify on a home for.

And if you're in that spot, even from like a risk management perspective,

I would say, probably not.

Yeah,

like your business grew a lot and like maybe we

don't all of a sudden bring up our expenses the same amount.

Um, you know, there's some risk management in there as a being self-employed of like,

yeah, the business grew that one year, but we don't know that's gonna continue.

And underwriters look at it the same way you had a, a second really good

year, but is that gonna continue?

So far there hasn't been a lot of stability.

We went 30 to one 50 and you know, in a business owner's head they're

like, and next year's gonna be 300 in an underwriter's head.

They're like, and next year's gonna be.

So underwriters are more pessimistic.

Business owners tend to be a little more optimistic.

So what ends up happening in those situations is the underwriter

usually is not going to just use the one 50 a year income.

They're either going to pull an average of the two and that's a

good role thumb for self-employed.

Uh, people is to look at past two years of income as an average, likely

what's gonna happen in the situation is the underwriter's gonna default more

towards a lower income than the average.

because that first year was so much lower than the second year.

So then often what they'll do is they'll ask for a supplemental year

to date, profit, and loss to see, okay, what is the income now trending?

We saw first year tax return, second year tax return.

How is income looking now?

Is it, is it higher?

Maybe we can default to an average, is it lower?

Maybe we're stick, gonna have to pull back to a lower income.

Um, and unfortunately there's not super solid.

Uh, like I can't just give you a really basic.

Rule to use, uh, because the income calculations are so

much more complex than that.

And often can be up to the underwriter's discretion on what they feel is going

to be, an acceptable income to use.

Because if we think about the underwriter, when they're looking at

your income underwriters, actually, aren't really just thinking like, do

I want to give John an approval or.

That's how we think.

They think like they're just sitting there wanting, gimme a thumbs up or

thumbs down in reality, they're going to take your loan and they're going

to sell it on the secondary market.

That's what happens for 80 plus percent of loans.

They get sold to, institutions like Fannie Mae or Freddie Mac.

And they're the ones who make the rules for these loans.

And so the underwriter, what they're thinking is when a Fannie

Mae auditor comes in here and they look at the loan and they're like,

you approved John with $150,000.

but he made $30,000 last year.

Tell me how that makes sense to you.

And the underwriter has to sit there and be like, um, that's a great question.

Mm.

and like that underwriter can actually be

penalized for things like that.

So that's the mindset that a underwriter is going through is mores.

What is what looks stable to somebody completely outside third

party who, expects, you know, is gonna take on the risk of this.

and so that ultimately is, is kind of what you're looking at two years is to

your average is a good role of thumb.

but it really can change, especially when you have big changes, your income.

Absolutely.

No, and I, I think that so many of the business owners, I know that we

work with will see explosive growth.

Like you just said, you know, you'll have a $30,000 a year and then $150,000 a year.

And.

Ideally, you're on track for what, a $500,000 year, you

know, who knows the next year.

And that's great, but there's also, there's just not a track

history, cuz it could be that you have a $30,000 year, $150,000 year.

It all burns to the ground.

You have a $50,000 year, you know, year three.

And so yes, your income hasn't necessarily completely dropped out, but

you're also not making $150,000 a year.

And I think when we look at.

I know from the tax side, we're always looking at claiming as

many deductions as we can, right?

Because anything that you could take to reduce your business income reduces

your overall taxable income, which reduces the taxes that you have to pay.

And no one necessarily wants to pay more in taxes, especially if you,

you know, can illegally avoid them.

And so with that, I know we had chatted and that there are some

deductions that can be added back in.

Right.

So you're, self-employed, let's just say that you've been in business

for five years, you know, you've had relatively consistent growth or income,

or, you know, you're able to see a reliable pattern for someone and they

have some deductions they've taken.

You had mentioned when we were chatting offline that one of the

primary deductions that can be added back in and to count towards your

qualifying income is depreciation.

I know that for a lot of our clients and a lot of other small businesses,

depreciation is either non-existent or not a particularly high dollar value item.

So I know what you had mentioned was that so many business owners, and

I know I've been guilty of this in the past, but you asked someone, you

know, Hey, Kyle what's your income.

And you say what your business makes in a given month or a given year.

Okay, cool, Kyle, but like, what do you put in your pocket?

Like what gets moved from your business account to your personal account?

after expenses?

Because I think so many of us are like, oh yeah, I had a $300,000

a year or $150,000 a year, but maybe you took home half of that.

That's what you're actually going to be looking to use to qualify.

realtors do this all day long.

And I, you know, I imagine.

This might be helpful, even just outside of the mortgage or home

buying conversation for people, just from a mindset perspective.

I know I got really discouraged when I first started in real estate because

realtors and loan officers do this all the time is, you know, they're self-employed

and they're, I, I made half a million dollars off CR whatever, a million

dollars, but then you actually start talking with them and you're like, yeah,

but you also spent $800,000 on your team and marketing and all the other costs.

so you ultimately only made whatever, like, and even though it was still a

good amount, you're going around telling people things that weren't actually true

and you compare yourself to that you're comparing what, you know, comes into

your bank account versus their gross

highlight real.

Yeah.

To someone's.

Yeah, exactly.

right.

And so it's important to remember when you are applying for a

mortgage, you are applying for your mortgage, not your business.

And so the underwriters looking at what is your.

Personal income.

another way to think about this is what is your business net income.

If you're a hundred percent owner of that business, your personal income is going

to be reflective of your business, net income, not your business, gross income.

And so often what I see happens with a lot of self-employed

people is they do write off stuff.

So let's say.

They make $150,000 gross in their business and they write

off, uh, $50,000 in expenses.

Now we joked about this on the previous episode of, you know, a write off doesn't

mean that like, that didn't exist.

You still paid $50,000 in expenses over your business.

That was part of what it is required to run your business.

So when you're looking at a mortgage, it wouldn't make sense for you

personally to say, I'm gonna base how much I can afford on $150,000.

That doesn't make sense, cuz you don't have $150,000 in income.

You have a hundred thousand that you can actually use to pay for a home.

So underwriters look at the same thing.

And so this is where people kind of get tripped up.

They're like, well, these are just writeoffs.

And so I should be able to add those back, but those are real business expenses.

You wouldn't be able to make the 150 without the 50.

so it's important to remember that the underwriter understands the same thing.

they're not gonna use your business gross income.

They're gonna look at the net.

Like, what did you actually make?

And things can be added back like depreciation, but most people don't

have, depreciation to add back that I've seen, if they do, they normally

have a larger, they're more like, a C Corp structure and they get paid

differently than a hundred percent owner.

So, it is important to remember that of like your underwriter's going to

look at what do you actually make.

And if you are a hundred percent owner of your business, that is going to be

the net income of your business, not what your gross business income is.

mean, I wish that would be wonderful.

Um, but also horrible at the same time.

Right.

Because you'd have people probably defaulting left and right on

loans because they don't actually have the cash flow to support it.

I know that when we're looking to take deductions for people and we're having

the conversation, you know, a new client comes on and we're having the chat of

like, what are your big life goals in the next, you know, two to five years,

are you looking to purchase a house?

You know, have children get married, anything that kind of

impacts their financial situation.

Because part of that is if they're like, yeah, you know, I really

wanna buy a house in the next year.

Okay, cool.

Let's look at what that actually looks like.

You know, if they know the area that they wanna be buying and if they know

kind of an idea of maybe home price or what they're looking for, we'll actually

look at that and be like, okay, great.

Either as a real rough estimate, we always encourage, you know, C loan officer to

like get your personal stuff sorted.

But from our side, your business should probably be making

this with this as a profit.

And that lets them plan accordingly.

If they do have a year or two to be ramping.

Okay, cool.

Maybe I paid $20,000 in like educational and professional, trainings that

I don't need to do this year or that I could drop for a few years

because they're not required.

And so I think that again, like with everything that we're looking at here,

a little bit of planning and foresight can go such a long ways in helping make

the qualifying process, especially as a self-employed individual so much.

Morelin.

Yeah.

And that brings up a good point.

I think for a lot issues with the deductions can come from the like,

well, if I knew this was gonna be an issue, I wouldn't have bought the

video equipment or I wouldn't have.

The course that I didn't really need, but I wanted, and I could afford, like,

I wouldn't have done those things.

If I knew I could buy a house.

And if you find yourself in that situation, there are programs that

will not look at your business.

Net income.

so there are programs called bank statement programs, and they'll

actually average, uh, either personal or business bank statements.

And they'll look at either a 12 month average or a 24 month

average, to use as your income.

So they'll take all the deposits, divide those by 12

or 24, um, to find your income.

And then they multiply at times a artificial expense ratio.

So this might be 50% for someone like.

Has low cost like realtor, it might be 90% meaning you can use 90% of those gross

deposits as your income, those ignore all of your deductions that you'd put in.

So those can be helpful.

Route.

However, interest rate is a lot higher and the down payment is a lot higher.

You're gonna be expecting to be due probably around 20 to 25%

down payment and interest rate is usually gonna be one to 2% higher.

Sometimes more depending on your credit score than a traditional.

So, what I've worked with clients on sometimes is getting them in

a bank statement program because that's the only thing they

could use to qualify for a loan.

and then over the next two to three years, they can readjust their

tax strategy to then be able to qualify for a conventional loan.

So they miss out on some tax savings, but they have better savings on

their interest because they can refinance into a lower interest rate.

Absolutely.

No, which makes total sense.

I think there's, there's so much strategy behind the timing and, you

know, do you have two years or three years where you can do this and have

it reflected on your tax returns?

Is the home purchase an immediate need that you need to do?

Cool.

Maybe we do look at bank statement.

Maybe we do, you know, it comes with.

I'm gonna save temporary downfalls potentially.

Right.

But also allowing you to do whatever that next step is for yourself.

But I think that so much of it is taking a step back for a second because

everyone's, you know, oh, I wanna pay as little in taxes as possible.

I wanna, I actually had someone say one time.

Well, my mom said that my taxable income should be zero because I

own a business at the end of the.

Hmm.

I was like, well, not just artificially zero and also

that's not gonna help, like cool.

It'll help you a lot with taxes.

It's not gonna help you when it comes time to qualify for anything.

Uh, you know, we're not just spending all of our money to try

and hit $0 and income because qualifying for things like a car or.

A home loan or anything else that you might need or credit card

gets a little bit difficult if you don't have any, you know, taxable

income at the end of the year.

especially if it's not authentic and you're just buying things

to overinflate your expenses that are not actually needed.

So I think that having a strategy between, of course, you don't

wanna not have any write offs if they're actually necessary for the

business, but having the discussion of where's that sweet spot between.

Business expenses.

Writeoffs qualifying for whatever my goals are and kind of

sticking within those lanes when

Yeah, absolutely.

Yeah.

And not going overboard on just one strategy, just cuz you know, and usually

the, the tax savings, I feel like for a lot of people, they overestimate how

much they can save in taxes by having a write off, where, saving a significant

amount of money in taxes requires a significant strategy, not just.

I put Starbucks on my business card.

It is a little more complex than that to find the savings that you want to

which is where like speaking with, with you and your team is a much better

approach than just let me just write off everything and then not actually

consider what is the whole picture of where I want to go, making sure that

everything I'm doing now aligns with that.

Well, and I think that some of the things that people

I'm gonna say kind of sleep on are retirement contributions, especially

as self-employed individuals.

you know, when it comes to tax strategies because, and great me if

I'm wrong here, but whe like if you're doing a, you know, an individual

401k that gets added back in.

To your gross income when you're looking to qualify.

I believe.

Cause I know if I remember correctly, it does with W2 income and that could be

a way that you're avoiding income taxes completely legally, but you're also not,

you know, buying, you're not buying a bunch of cameras or video equipment that

you didn't actually need or upgrading it, but you're still having, you know,

a tax savings that goes along with it.

Right,

Yeah.

have to double check on the business contributions to retirement, but I do

know on the personal side, you can.

right, right.

Yeah.

So yeah, if you're maxing out, like, let's say you have an, I 401k,

I think it's $20,500 this year.

Um, if you're able to max that out on the personal side, the.

I don't think would be added back in.

I would be interested.

Maybe we'll add that in the notes to this.

Cause I'd be interested to know what that looks like on your end.

I would expect it to not count towards your income because

it is a true business expense.

The other thing for.

Tax reduction strategies, and it doesn't necessarily make a difference, like

you said, for qualifying, but if you are a single member, LLC, and you've

elected to be taxed as an S Corp, which I know a ton of our clients have been

because there's a pretty substantial tax savings that comes with that.

Being taxed as an S Corp is not helping you to qualify for, you know, in the

home loan or the home mortgage process.

However it can be reducing.

Your income taxes dramatically, which can provide savings that you're looking

for to fund that down payment, to fund that emergency fund and to have

available cash on hand to, you know, actually live a life that you enjoy.

So it's still the same income that passes through, but you're paying

potentially less taxes on that.

Yeah, I think that's a much better strategy to begin with than

just let me go right off every single expense possible and actually spend

money on that to try to save, uh, get

Right.

Right.

It's like, uh, what is it jumping over dollars to pinch pennies or something, but

Yeah.

just not necessarily like the, the most sound financial strategy.

I know we see it happen a lot because there is there's that misconception that

like, oh, I spent a hundred dollars.

I saved a hundred dollars on taxes.

Like, no, you spent a hundred dollars.

You probably saved between $12 and $22 on taxes.

So you're still out 80 ish.

Um, Was there anything else that you wanted to share when it comes to being

self-employed and you know, the strategy around buying a house and maintaining

that W2, if you can, and kind of everything that factors into that.

I mean, I feel like we, we covered a lot in this, but is there

anything that we're missing?

Yeah.

I feel like for most people, like it can feel very complicated

and there are moments in which there is a complexity to it.

However, for most people, um, it's kinda the same thing with student loans

where people feel really overwhelmed.

I don't know if I can buy a house student loans and then we'll take a look and

they get approved and they're like, wait, That's with my student loans.

Like, yeah.

They're not a problem.

It's kinda the same thing with self-employed is like a lot of

people are like, man, I don't know.

And it's just confusing and it's a lot of moving pieces and then they get

approved and it's not a problem at all.

Sometimes in our minds we can overcomplicate things and there are

instances in which there's complexity in.

It requires some more paperwork and some more creative figuring out solutions.

But for the majority of people, if you've been in business, when you've had

consistent income for a few years, Odds are you're gonna be able to get approved

and it's gonna be fine, and it's not going to be an issue that you run into.

and so don't be afraid to talk with the loan officers, start that

process and get things moving, and then figure out what's the game plan

that needs to happen afterwards.

instead of trying to figure it all out, have all the anxiety without even

knowing if it's a problem to begin with.

Absolutely.

I could not agree more.

Take some time plan, get your information.

then make a plan for how to move forward instead of getting so in our heads.

And I think so many of us make the mistake of building things up when

really we could just take like 20, 30 minutes to move forward and have

significantly less anxiety around it.

Well, Kyle, that was jam packed.

Next week, we're going to have our final episode in this mini series.

And we are going to be talking about the housing market at large,

which actually is one of the topics.

I think that I'm most excited to chat about with you because

it is changing a lot right now.

And the timing of this season, I think could not have been

better for us to be recording.

So we will see you all next week and chat them.