SitePoint Sponsor

User Tag List

Results 1 to 13 of 13
  1. #1
    Design Addict helix7's Avatar
    Join Date
    Oct 2004
    Location
    New Jersey
    Posts
    440
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)

    How self-employment looks to lenders

    I've been debating my future employment status, whether to remain in my full-time job and continue taking freelance jobs on the side, go full-time freelance, etc. One of the issues that has come up in weighing my options is how going full-time freelance would affect my financial picture, not just in terms of dollars and cents, but in how others perceive my employment status.

    For example, I plan to purchase my first home early next year. Income isn't an issue, whether it comes from the day job, freelance, or wherever. I'll have enough money to qualify for the sort of loan I'll need, at least in theory. But I'm wondering if the source of that income factors into the equation. Do banks and lenders look at your employment status differently if you are self-employed? Are you considered more of a risk, and thus not able to qualify for higher loans?

    Any of you self-employed folks have any experience with these things?

  2. #2
    SitePoint Addict
    Join Date
    Apr 2005
    Location
    San Diego, CA
    Posts
    205
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    Yes they do look at it differently because you have to wear all the hats to make the business successful whereas if you're an employee, in the banks eye you're a safer risk. It's just the way it is. Lenders differ slightly but the main measure they'll use is 2 years in business or employment.

    DISCLAIMER: This is not legal or accounting advice, seek competent counsel before using any information in this message.

    My suggestion to people in this situation is to incorporate in a cheap state like Nevada or Delaware that also have non-disclosure laws so the corporation and the secretary of state do not have to release the names of the officers and directors (i.e. you and you) without a court order.

    Now you're "just" an employee of a company that pays you a salary like everybody else. Give the bank the phone number (line-2 in your "office") to "accounting" that can verify your income. Be truthful on your applications and in confirming the numbers and years of employment when and if they call. The sooner you get the process going the more time you can claim "on the job." GL
    I study speed waiting. I can wait an entire hour in 10 minutes.

  3. #3
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
    Join Date
    Apr 2003
    Location
    Denver, Phang-Nga, Thailand
    Posts
    4,379
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    Quote Originally Posted by PHPCamp.com View Post
    Yes they do look at it differently because you have to wear all the hats to make the business successful whereas if you're an employee, in the banks eye you're a safer risk. It's just the way it is. Lenders differ slightly but the main measure they'll use is 2 years in business or employment.

    DISCLAIMER: This is not legal or accounting advice, seek competent counsel before using any information in this message.

    My suggestion to people in this situation is to incorporate in a cheap state like Nevada or Delaware that also have non-disclosure laws so the corporation and the secretary of state do not have to release the names of the officers and directors (i.e. you and you) without a court order.

    Now you're "just" an employee of a company that pays you a salary like everybody else. Give the bank the phone number (line-2 in your "office") to "accounting" that can verify your income. Be truthful on your applications and in confirming the numbers and years of employment when and if they call. The sooner you get the process going the more time you can claim "on the job." GL
    That is some strange advice - if you are trying to qualify for a loan then the last thing you want to do is to hide your financial details. Incorporating in NV and not disclosing the officers will basically make your income look more shaky than if you were just self-employed, so I don't really get it.

    If you have great credit + 20%+ down plus the mortgage payment x 3 months in cash on hand and steady employment, you should be fine.

    If you are self employed, they will want to see evidence (your tax returns) that you are stable, your income is reasonably consistent, and that everything looks legit. If you incorporate, the same rules apply and they will want to see information that shows that you are an employee of your company or have something like Schedule K/s-Corp/LLC income on your taxes each year.

    What can get sloppy is if you are working steadily as a full time employee, then suddenly you own a Nevada LLC which has less than a year of history - that makes you look like a real risk.

    One approach if you really need to form an entity (which you might if you are going 100% on your own) is to formally hire yourself as an employee to your company, with a W9/1099, payroll, and everything. And, hire yourself at an equal or slightly greater pay that you've had in the past. Then, at least you can demonstrate continuous full-time employment (verifiable, even if you are also the employer it's still real) and that looks better on paper.

    Being a full-time employee of your business is sometimes a great idea depending on taxes, but it depends on your circumstances.

    In my experience, there is no substitute for lowering the LTV ratio on your mortgage, so if they are giving you a hard time you can probably increase your downpayment to get them into a higher equity loan (i.e. you put 32% down instead of 20% and it can still fly).

    DO NOT form a veiled/secret LLC - it makes you look risky, imo. Stability and transparency is what you want to show them. You may also want to pre-qualify now, then when you are ready you will already have a relationship with the bank - that can make a big difference.
    The fewer our wants, the nearer we resemble the gods. Socrates

    SAGEWING LLC - QUALITY WEB AND MOBILE APPS. PREMIUM OUTSOURCING SERVICES.
    Twitter | LinkedIn | Facebook | Google+

  4. #4
    SitePoint Wizard Lil_Red's Avatar
    Join Date
    Jul 2001
    Posts
    3,400
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    I have to agree with Sagewing's advice. Being secretive is only going to make you look like a bigger risk.

    I'd also suggest buying the house prior to changing your employment status just to make life easier on yourself.

  5. #5
    SitePoint Addict
    Join Date
    Apr 2005
    Location
    San Diego, CA
    Posts
    205
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    I agree with about 20% of what you said. The rest is consistent with common misunderstandings about how Corporations work and are seen by the IRS and the law.

    I didn't say anything about forming an LLC, that would be dumb. Everything you said after that regarding LLCs is irrelevant. I always suggest forming C corps for many reasons, S-corps where net income is a real issue. But never ever ever an LLC. Oh wait, unless you're forming a partnership to hold real property like real estate but that's a different forum.

    Quote Originally Posted by Sagewing View Post
    One approach if you really need to form an entity (which you might if you are going 100% on your own) is to formally hire yourself as an employee to your company, with a W9/1099, payroll, and everything.
    ...
    Being a full-time employee of your business is sometimes a great idea depending on taxes, but it depends on your circumstances.
    My previous disclaimer is still in effect. There's no reason to use a 1099 if you're a full-time employee.

    The biggest misunderstanding is Corporations are legal entities owned by it's shareholders, controlled by the board of directors and operated by it's employees. Therefore you cannot hire yourself. The corporation hires you. Big difference. There's nothing secretive about forming a corporation, drawing a salary as an employee and reporting that income on loan applications. The protection a corporation provides is well documented in law so it's a bit misleading to talk about those entities as somehow dishonest.

    Now if you form a simple company by getting a fictitious name with your county then yes, it is your company but you wouldn't file a W4 or get a W2. You'd typically report it on a schedule C with your personal taxes.

    Quote Originally Posted by Sagewing View Post
    And, hire yourself at an equal or slightly greater pay that you've had in the past. Then, at least you can demonstrate continuous full-time employment (verifiable, even if you are also the employer it's still real) and that looks better on paper.
    This I agree with in spirit but has nothing to do with past earnings. It has to do with net income of the business. Putting more salary than the business makes is not a good idea. They usually call it fraud.

    Anywho. Get professional advice before taking any action and don't listen to message board advice, some of it's accurate some not so much. GL
    I study speed waiting. I can wait an entire hour in 10 minutes.

  6. #6
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
    Join Date
    Apr 2003
    Location
    Denver, Phang-Nga, Thailand
    Posts
    4,379
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    Sounds like you've got it all worked out. I thought that I was a full-time employee of a corporation that I own 100% of AND I have been through the mortgage qualification process repeatedly, but that must just be a hallucination!

    I wasn't able to make sense of your response, or even relate it in a coherent way to the original poster's question, but good luck
    The fewer our wants, the nearer we resemble the gods. Socrates

    SAGEWING LLC - QUALITY WEB AND MOBILE APPS. PREMIUM OUTSOURCING SERVICES.
    Twitter | LinkedIn | Facebook | Google+

  7. #7
    SitePoint Addict
    Join Date
    Feb 2008
    Posts
    228
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    I think you have to show earnings for more years and come up with more down

  8. #8
    SitePoint Evangelist
    Join Date
    Nov 2002
    Posts
    423
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    Getting loan if you are self employed is for sure harder than if you have a permanent job...

  9. #9
    SitePoint Addict
    Join Date
    Apr 2005
    Location
    San Diego, CA
    Posts
    205
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    No problem. I live in CA which has some of the most convoluted laws regarding corporations in the US so we have to practically get a Ph.D when forming entities. I've been a party in partnerships and multiple member corporations and the paperwork alone is mind-boggling so my posts are probably confusing to the average person. I'll tone it down and talk in simpler terms in the future. I guess the moral is get good advice before forming a corporation. Cheers!
    I study speed waiting. I can wait an entire hour in 10 minutes.

  10. #10
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
    Join Date
    Apr 2003
    Location
    Denver, Phang-Nga, Thailand
    Posts
    4,379
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    All that must be the problem. It's all just too complicated for me to understand!

  11. #11
    Design Addict helix7's Avatar
    Join Date
    Oct 2004
    Location
    New Jersey
    Posts
    440
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    Ok.. how about this hypothetical scenario:

    What if I could make twice as much freelancing as I do working a regular full-time job?

    In other words, is there a point where increased less-stable self-employed earnings would trump the stability of a full-time job in the eyes of a lender? Like if I can make $60,000 a year in a steady full-time office job, how does that compare to a first-year freelancing income of $120,000?

  12. #12
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
    Join Date
    Apr 2003
    Location
    Denver, Phang-Nga, Thailand
    Posts
    4,379
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    It would depend on your credit history and most of all your down payment. The LTV (loan to value) is really important when getting a loan. If you are buying a 300k property and putting 100k down, your LTV is very low and you won't have as many problems getting a loan since the loan will be well secured. Conversely, if you are buying a house worth 100k and only have 5k to put down, your LTV would be 95% and the banks might give you a very hard time. As a rule of thumb, things get much easier when you have more than 20% down, but that's always 20% of what the BANK thinks the house is work - not what you are paying for it! Another rule of thumb that I've heard is that most credit evaluators will see an employment of less than 2 years as 'new' and less stable.

  13. #13
    Design Addict helix7's Avatar
    Join Date
    Oct 2004
    Location
    New Jersey
    Posts
    440
    Mentioned
    0 Post(s)
    Tagged
    0 Thread(s)
    Well then I'm screwed anyway. I've only been at my full-time job since November. So either way I'll be seen as a risk. Sounds like it will come down to how much I can put up as a down-payment. And therefore which employment route will allow me to get the most money saved up.

    I guess I just have to ride it out and see what happens. I'm still doing freelance work on the side, and if it continues to grow to the point where it looks like I could be making a lot more money as a full-time freelancer, maybe I'll just make the jump. I'm already at a point where my freelance work pays about 50% of what I get from the day-job, and I only spend about 25% as much time on the freelance stuff. So in theory, I'm already at a point where I could quit the day-job, spend 4x as much time on the freelance work, and possibly increase my total income by 33%.

    Of course that doesn't account for time spent ramping up the freelance work to make up the difference, so I would want the freelance work to grow to a higher percentage before making the jump. But it does get me thinking...

    No need for rash decisions though. I'll wait it out for now and see how things go through the summer.

    Thanks everyone for the advice. Much appreciated.


Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •