Most Real Estate Agents, unless they run their own brokerage, will file a Schedule C on their Federal Tax Return as a sole proprietor business owner/1099 independent contractor. Therefore, their qualifying income is not calculated the same way as salaried/hourly wage home buyers. This puts them and other independent contractors at a disadvantage when trying to purchase a primary residence as their qualifying income depends on how aggressive they have been in the last two years with their business expenses and deductions.
How lenders typically calculate income for Real Estate Agents
Overwhelmingly, lenders use line 31 net adjusted income after all business expenses and deductions have been subtracted. Additionally, line 24b (meals and entertainment) expenses are subtracted out since the allowable tax deduction is only 50% of the cost and lenders use 100% of the cost in qualifying income ratio (this typically has a negative impact on Real Estate Agent income). Depreciation is added back in to income but usually not a factor for Realtors. Income is averaged over 2 years if increasing and most recent year income used if declining. Current 1099 or gross income for this year is only used to validate qualifying income on tax returns and cannot be used to increase the average income.
With the lower level of net income available for qualifying for a mortgage, there is one big benefit in buying an investment property instead of a primary residence. A portion of the market rent of the subject property can be used to offset the total housing payment, whereas with a primary residence purchase, the Realtor/independent contractor would have to qualify for the entire housing payment.
How lenders treat market rents on the subject property for investment purchases
Subject property rental income is determined by the appraiser in a purchase transaction on a Market Rent Analysis and Operating Income Statement. Lenders typically use 75% of the gross rent amount determined by the appraiser to offset the total housing payment. In that way, it may be easier for a Realtor to buy rental property than a primary residence, especially if the real estate agent has an inexpensive current housing payment. Down payments for SFH is 15% minimum for investors and 20% minimum for condos. The best investor interest rates can typically be found with 25% or more down payment, so the more the better, if you have the extra cash.
The bottom line is that an investment property purchase may be a better first home purchase for a real estate agent IF they have the resources for the down payment.
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Great website Jay, and terrific info (love the images & video too!!) You cover many details that are so often not shared with people. Thank you for being our lender the last 15+ years, you’ve helped us make (and save!) so much money!
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