Buying or Refinancing When Your Income Runs Through an LLC

Owning an LLC doesn’t stop you from getting a mortgage. It changes which documents I need and how I count your income. The first question I ask every LLC owner is how the company is taxed, because that decides everything else.

I get this call a lot. The owner has a healthy business, a good credit score, and a lender who keeps asking for paperwork nobody understands. Most of the confusion goes away once you know which form your income lives on.

How does a lender count LLC income?

It depends on how the IRS treats your LLC. An LLC is a legal structure, not a tax category, so the same LLC name can show up on three different forms.

• Single-member LLC: you usually report on Schedule C of your personal return. Fannie Mae’s Selling Guide has a specific section for how lenders analyze Schedule C income.
• Multi-member LLC taxed as a partnership: your share shows up on a K-1, and the company files its own return.
• LLC taxed as an S corporation: you may pay yourself a W-2 salary and take the rest as K-1 income.

In my experience, the lender wants to see the personal return and the business return, and wants the two to agree with each other and with your application.

What can be added back to my income?

Some deductions on your return are not cash that left your bank account. Fannie Mae’s guide tells lenders to add back recurring items on a Schedule C such as depreciation, depletion, amortization, casualty losses and business use of the home. That means the bottom line on your return can understate what the business produces.

Here’s a hypothetical. These are made-up numbers to show the math, not a program or a payment I’m offering.

• A partner owns part of an LLC taxed as a partnership. His K-1 shows $60,000 of ordinary income and $30,000 of guaranteed payments, which is $90,000, or $7,500 a month.
• His share of depreciation is $12,000. Adding that back makes it $102,000, or $8,500 a month.

That $1,000 a month difference can decide whether a loan amount fits. This is the kind of detail a bank’s online pre-approval doesn’t catch.

The edge: ownership percentage changes which documents you need

Here’s what most LLC owners never hear. How much of the company you own changes the paperwork. Fannie Mae’s guide requires business returns to support what’s on your application for partnerships and corporations. In the bank statement loans I do, ownership matters too. In my experience a business bank statement program can work with as little as 50% ownership, while a personal bank statement program can work with as little as 25%.

You also have to prove your percentage. A CPA or tax preparer letter, an operating agreement that spells out the ownership split, or a K-1 can all do it. If your operating agreement is vague, fix it before you apply, not during underwriting.

What if my tax returns don’t show enough income?

Then I look at a different program. The returns come first, because a conventional loan usually carries the lowest rate. If they fall short, a bank statement loan qualifies you on 12 months of personal or business bank statements instead.

Most lenders call that a non-QM (non-traditional) loan. A Qualified Mortgage, or QM, is the CFPB’s category for a loan built with safer features. A non-QM (non-traditional) loan sits outside that box but still has to meet the federal ability-to-repay rule. It just proves your income with deposits instead of returns. Because the lender takes on more risk, in my experience the rate typically runs about 1% to 2% higher than a traditional loan, and it varies by file and market.

I walk through the full process in What Is a Bank Statement Loan and How Does It Work?, and the common write-off problem in Why Your Tax Write-Offs Are Hurting Your Mortgage Application.

A pitfall I see: the property that lives in the LLC

This is a hypothetical, but it’s a pattern I see a lot.

A business owner applies for a home purchase and lists his house and his business. He leaves out a rental condo that his LLC owns, because the business pays the mortgage and he thinks of it as a company matter. Lenders have tools to find every property, so it comes up during due diligence. The payment gets added to his debts, his debt-to-income ratio jumps, and a loan that fit three weeks earlier doesn’t fit anymore.

Every property gets found. The only question is whether it’s found on day one, when I can structure around it, or in week three, when you’re under contract. List everything, including anything held in an entity.

What to do before you apply

1. Find out how your LLC is taxed. Ask your CPA which form your income flows through.
2. Gather two years of personal and business returns, including every K-1.
3. Write down your ownership percentage and locate the document that proves it.
4. List every property owned by you or any entity you control.
5. Check which account your business deposits actually land in.
6. Send it all to me before you tour homes, so I can tell you which program fits.

I’m a mortgage broker with NEXA Lending, and I work with borrowers in all nine states where I’m licensed (CA, CO, TX, FL, GA, NC, SC, TN, VA). As a broker, I can shop your loan across a wide network of lenders instead of being stuck with one bank’s programs. See how I handle these files on my business owner mortgage page. Programs, rates and approval depend on your full file, and individual rates vary.

Sources: Fannie Mae Selling Guide B3-3.3-03, Schedule C income (opens in a new tab), Fannie Mae Selling Guide B3-3.2-01, self-employed documentation (opens in a new tab), CFPB, What Is a Qualified Mortgage (opens in a new tab).