What Is the Business Owner Mortgage Penalty

What is the business owners mortgage penalty? And that’s my made up words about what this is, John. Right. But essentially, as a business owner, you’re writing things off on your taxes and you’re taking the correct tax deductions that you should have to lower your income and doing so, you don’t qualify for traditional mortgages.

So in that scenario, you’re going to have a rate adjustment that’s going to be a higher interest rate. And for that, there’s going to be like this offset penalty, but approximately in super broad terms, what kind of interest rate adjustment?

I mean, so it can add we’re typically if you’re conforming, you’re usually about 1% higher to one and a half percent higher, just depending on certain criteria than what a traditional home loan is. So it’s nothing scary.

And, you know, yes, we’ve come in from the days where rates were super, super low and we’ve gone through these new adjustments and so forth. In all reality, when you really do the math on it, Mike, it makes sense to continue to do what you’re doing with your business because the slight difference in the grand scheme of things doesn’t make a huge difference.

Yeah. So like, let’s kind of look through a scenario here and I’m going to even go and say it’s 2% right for an adjustment or two and a half percent, whatever that number is. So if rates are currently at.

Five and 7/8.

So we’re in a round in say 6%. So we’re going to say today’s rates are about 6% for a conforming 30 year fixed loan. And now we’re going to have a rate adjustment of 2%. So now it’s going to be roughly, say, 8%. So now if we look at the mortgage and we do the calculation, we run that back and look at the difference between the two.

That’s what I would consider the penalty that the lender not it’s not you, you’re not doing it. It’s what the market is requiring. But for an individual to buy the home without proper income documentation, that is traditional.

So now this business owner pays that penalty. But the offset for that is.  

I mean, it’s it’s it’s again, the offset isn’t that much because yes, it’s a slightly higher payment. Right, slightly higher amount of interest. But if you kind of break down the math a little bit different, where if you were let’s say you’re claiming 300,000 in net income for the year, your tax liability on that is, what, 890 grand or so that you’d probably be paying out the tax. So it takes a lot of interest to make up 90,000 and that’s on one year.

Okay. Know so if you did traditional again. Well, I’ve got to make sure my tax returns and I’m not encouraging anyone to do something different on their taxes. I’m not a CPA. Right. But just looking at it logically and mathematically. Right.

The slight difference in mortgage payment or interest that you’re paying over the term, you know, definitely is in your favor versus paying that full blown of what you showed without doing your deductions that you’re entitled to take and so forth. Yeah. So it really I wouldn’t say there’s much of a penalty for it.

No, it’s a net. It’s a net income. I think it’s a positive. Really, really is.  

We did this on a deal. We kind of looked at. Right. It was a $1.9 million home purchase business owner.

So let’s talk about who wants to today write a contract on a property for. 1.9. 9 million.

If so, called John and called three of your favorite business owners. Yes. All right. Keep going.

And we did the math on it, you know, because we’re looking at the, you know, the variance in interest rate. And even as I’m looking and we’re we’ve been in an environment where rates are going up a little bit, the rate was a little bit higher than a traditional deal. Right. And if they had really wanted to qualify for a 1.9, it was actually 1.8999. I’m getting ahead of myself. Yeah. All right.

So so if they would have really wanted to qualify for that, the tax liability that they would have been having been paying over the last couple of years was huge.

Yeah. The amount they have to make to qualify for that price home right. Is is astronomical.  

But their business bank statements backed up everything they had their personal business their personal statements backed up what they had that won’t actually use the penal program, but because it just worked out to be a little simpler for them. Right. But there’s money there. These are these are clients that have money. They just need to be educated on what they can do to purchase the house that they want.

Perfect. And there is something else that would go with this that I want to say. Right. So are there any prepayment penalties or anything like that in these different things?

No prepayment penalties on them. So you can still if you win the lottery, you can pay it off on some programs they have. And if you’re trying to do like an interest only type option, there’s some stuff like that. But for most of them there again, just the it’s in front of those terms. It’s there’s no prepayment penalties or anything like that.

So that’s great. So if something changes and then they could pay additional principal payments off, so maybe send in extras, right, to do that if you want to get that down or you could refinance. If interest rates go down.

Just knowing that there’s still the same delta, but you’ll most likely be at a lower LTV in the future. And you could re assess what’s going on because you would have probably possibly a price appreciation in the Home, definitely.

Within with a new appraisal. And you would also have maybe a new lower balance. So now maybe you went from 80% to 60% LTV or 40% LTV. Is the individual going to have a better interest rate if they have?

Typically, yes, Mike, the the the lower the loan of value, the less the investor lender looks at as the risk factor. Right. So higher LTV, higher chance of maybe there’s an issue with it when someone has, you know, 40, 50, 60% of equity in their home, they’re going to pay it.

They’re going to figure a way to either make the payments or if there’s a bigger issue, get the house on the market, keep their money. No one’s going to want to walk from that amount of of of equity that they have. Yes. So in all reality, it’s actually truly a lower risk program because these do require larger down payments.

All right. Well, thanks very much, Jon. So if anyone has any thing that would help out any of these business owners, just contact John. He’ll have all those information and we’ll get that over to you guys. But that’s a great way to continue to grow your business in. The short answer is there’s not actually a mortgage penalty. It’s actually if you net everything out, it’s a positive.  

100%, a huge positive one.

For being a business owner and how you can do it, you are going to have to put in extra effort and you are going to know the right person to call. And John has been in the business for how many years now, John? 20, 23 years.

That’s all myself.   That’s a long time. That’s starting the beeper days.

Episode Links

CPA, lower LTV, Mike Acquisto , Shana Acquisto , TNT 

Episode Recorded Live on YouTube 06.26.22

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