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Unformatted text preview: loyed, the lenders may require much more information. Usually, the lenders will require either an acceptable profit–and–loss statement and balance sheets for the 2 years preceding, or complete copies of signed federal income tax forms from the previous 2 years. If the homebuyer is self–employed and has recently formed a new company, many lenders will require the in–formation outlined above and current financial statements on the business as well as verification of the
Dynasty School (www.dynastySchool.com) 13-7 REAL ESTATE FINANCE
employment of the home–buyer for the 2 previous years. A person on straight commission or royalty income for less than 2 years will have a difficult time securing a mortgage, in particular if the prospective buyer is a real estate salesperson on a straight commission basis. Some commissioned people incur expenses that are not reimbursed by the employer. These expenses must be subtracted from income to arrive at a true income figure. Lenders require income tax returns from commissioned people to verify incomes. Self–Employed – A self–employed borrower must supply the lender with a balance sheet and profit and loss statements for the business, usually to the end of the most recent quarter. A balance sheet shows the assets, liabilities, and net worth of the business. Profit and loss statements must be provided for the last two years; some lenders require as many as three years of P&L statements. The borrower's income is based on these statements if it appears that the business will continue to produce the same level of income. Profit and loss statements should be carefully analyzed to arrive at a true net income figure. For example, depreciation on real estate is shown as an expense; however, it is not a cash expense, therefore it can usually be added back to net income. By the same token, capital gains taxes must be deducted. In addition, copies of income tax returns filed for at least two years are required. Bonus – This type of income can...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10