Alan Van Zee
President | NMLS #: 297154
Hawaii Mortgage Company, Inc.
Company NMLS #: 232582
alan • www.hawaiimortgage.net
Want to Close in 2015? Start the Application Process Now
We are about to entering into the middle of November and the Holidays are fast approaching. It is that time of year when many, including those in the mortgage industry, take some personal time. Couple that with the Federal holidays ahead, and the result is longer underwriting and closings for your mortgage transaction.
If you are purchasing and wish to enjoy the tax benefits in 2015, you must close before December 31st. If you are thinking of refinancing for tax benefits as well, you have the same deadline. In order to meet the anticipated slowdown, get started now.
And as noted in the market wrap section above, the Fed is expected to raise rates at their next meeting in December. So if you were planning on waiting till after the holidays, you’ll most likely have a higher rate than if you started now.
Moving from Employee to Independent Contractor
It seems like a growing trend in today’s workforce. Businesses are looking for ways to cut employee expenses, and many people are beginning to learn of the tax write-offs of being paid as an independent contractor.
As an employee your wages are categorized in the mortgage industry as W-2 income – the tax form you get at the end of the year detailing your earnings with your employer. As an independent contractor, you don’t earn wages. You are paid a fee for your services. We categorize that amount you are paid as 1099 income – the tax form used for this type of income.
In many cases someone who has worked for years at the same company will be switched to contractor status, yet do the same work before the switch. Additionally, you may also get paid the exact same amount. While it all seems same-same, it is vastly different in the eyes of lending. In one case you were an employee, and in the other, you are self-employed.
So why is it an issue? To understand, one must first step back and remove themselves from the equation to see the difference. In mortgage underwriting for income, stability of that income is the primary concern, even over how much one is paid. As an employee, length of employment and any gaps in employment are scrutinized. If one is self-employed, that stability is verified by two-years of tax returns showing your self-employed income.
So let’s look at the employed applicant. That person is an employee with a company. They work and received compensation for their time. They didn’t own the business. Since they don’t own the business there’s no requirement generally to the stability of that business or the length of time that business has been in existence. It isn’t necessary, because the stability of income comes from the borrower’s track record of earning regular wages.
For the self-employed that stability is gathered from the tax returns. You are no longer an employee, per se, but the owner of a business. So the stability all falls on that business, and not the individual.
So while it may seem ridiculous that if one were to switch from employee status to contractor making the same earnings it would be looked at the same, but it is not. It all comes down to stability of that income.
In the example above, that new self-employment income cannot be used by a mortgage application for a minimum of 2 years. This is VERY important for anyone to understand if they plan on applying for credit and know that this possibility may occur. If this is you, act now, while still an employee, or resign to know you have 2 years before that income can be counted.
Next week, the second biggest report of the month, Retail Sales, will be released on Friday. Retail Sales account for about 70% of economic activity. Before that, the JOLTS report will be released on Thursday. JOLTS measures job openings and labor turnover rates, and this report is closely watched by Fed officials. In addition, there will be Treasury auctions on Monday, Tuesday, and Thursday. Mortgage markets will be closed on Wednesday in observance of Veterans Day.
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443 Portlock Road, Honolulu, HI 96825
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