Ep. 42 | Mortgage Prep 101 (mortgage readiness)
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Speaker 2:Hey, everybody. Welcome to episode 42 of Teaching Tax Builder podcast. Today, we're gonna jump right into great topic as always, mortgage prep one zero one. And before we do that, let's take a quick moment and thank our sponsor.
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Speaker 3:You can look in our show notes or email us at hello@teachingtaxflow.com.
Speaker 2:Welcome everybody back to the Teaching Tax Flow podcast. You may recognize this guest who's gonna join us today all the way back from episode six. Believe it or not, that's November of last year. So we're we're throwing the ball way back into history. Berna Carls, how we doing?
Speaker 2:The mortgage shop. What's up? Was that that long ago?
Speaker 4:It does not feel that long ago. Wow. That's crazy.
Speaker 2:Wait. Time time goes by fast when you're having fun and you're making money slash saving money with taxes. So we introduced you first, of course, my cohost, the stunning young chap, better known as Chris Piquero. How are we, buddy? John,
Speaker 5:did you go to happy hour?
Speaker 2:No. Not not yet. I mean, up to date, he's happy around this show.
Speaker 5:We're not you know, we're never gonna put us on YouTube. After that introduction, I don't want anybody disappointed.
Speaker 2:My Pull it out of here. Hey. It's all about setting expectations. And today, we're gonna set some good expectations with mortgage prep one zero one as we really focus in a little bit on that, what, first time home buyer and and maybe talk about Brett, I know you actually made a great post on y'all's Facebook group. I heard somebody had commented on there.
Speaker 2:It might have been me. I don't know. Not to toot my own horn. About the best ways to completely muck up the process for you guys. So, I know you guys are both in Tennessee.
Speaker 2:I'm up here in Michigan, so I don't I'm not chiseling any icicles off my beard yet. But did you guys know that tomorrow, completely unrelated, or, actually, today is National Climb a Mountain Day? Who won? Know that. So I expect both of you to get out and climb some hills.
Speaker 2:Yeah. But let's get back on topic. So, Britta, kinda walk us walk us through this a little bit. So, obviously, you guys are really, really good at what you do. You see all types of clients all around the country, all types of situations.
Speaker 2:Maybe start us off with, you know, how does that process really look, a very condensed version of it For somebody who's looking for that first time really that first time property, whether it's a primary or an investment property, what does that look like?
Speaker 4:Yeah. I mean, if you were looking at primary first, you know, it's somebody that you could have owned a primary residence before. Maybe you rent now. I'll give you an example. Like, my husband and I owned a property, and then back in the day, I sold it to pay off my student loans.
Speaker 4:And then we rented a property for a while, from a builder we knew. And then it was just last year that we stopped renting and bought our new primary residence. So you can go from, you know, one primary residence then renting to another primary residence. You don't have to be like that first time home buyer or what people hear, and I'll kinda go into what that means. But, yeah, it's just like if you're renting and then you're ready to take that next step, maybe you have a little bit of down payment, maybe you have a a family member that's wanting to gift you those funds for your down payment to get a primary residence.
Speaker 4:You can do that, and be pretty much the same or better at your monthly payment than you would be paying somebody in rent. And people are like, well, why would I wanna pay the same if I have to move all of my stuff? Well, it's because your property is hopefully appreciating. So most areas that we're in, you know, your property will be appreciating. You own that.
Speaker 4:You're paying on that mortgage as opposed to paying somebody else's mortgage on that apartment that you're renting or property that you're renting, and your money is actually going towards something, going towards that investment, to own a primary residence. It's the same with investments and second homes as well. You know? It's maybe your point isn't to pay money like, pay for your mortgage for primary residence, but it's also for income producing, for appreciation as well because people need to look at that when they're investing in properties. So it's pretty much the same thing.
Speaker 4:Pretty much all documentation, same documentation required. It's just what the borrower's, primary goal is at that time.
Speaker 2:Awesome. And you mentioned documentation. Right? So we're not talking about passports and work visas here. And this is where we can pick Chris Pick's brain a little bit.
Speaker 2:Right? So, really, the mortgage process and taxes go hand in hand. Right? They're they're basically married at the hip. So I don't know, Chris, if you wanted to jump in and talk maybe a little bit about how how you and and your your practice and your life have kinda helped support individuals getting up to the closing table.
Speaker 2:And then, Brett, obviously, feel free to chime in and, you know, tell us how people have completely messed this up or what really looks best in that process.
Speaker 5:We know that in teaching tax flow, one of our three laws is that, tax agencies are your involuntary business partner. Tax laws are written to encourage and discourage certain behavior, and they're definitely encouraged to, encourage they definitely encourage home ownership. If you think about this, if you were own a property, you are allowed to deduct your mortgage interest and property taxes, instead of when you pay rent, you can't. So you and you're using pre tax dollars when you own a home, and you're using after tax dollars when you're not. And if you're at a marginal tax rate of, let's say, 25%, that's a significant difference.
Speaker 5:We also know about the importance of tax free income and growth, our bold diagnosis. In one of we did a podcast that was very popular, about how a married couple can make $500,000 tax free. And that podcast was about the section one twenty one exclusion. So what Brenna mentioned is instead of paying someone else's mortgage down, or putting money in their pocket, if you're building equity within your property, for the 99% of the people out there when they sell that property, and it was their primary residence, that is tax free. So you're using free tax dollars to make for many of your expenses related to home ownership, yet when you pull the money out of it, you don't pay any tax.
Speaker 5:It's the exact opposite of like a four zero one k plan in a way. So there's a lot of benefits to home ownership from a financial standpoint, let alone pride and, you know, just having a nice asset, having that security of owning a property. So, the tax benefits are right there, and really, if you're, you know, a lot of times what you're paying in rent is gonna be more than what you're gonna pay on a mortgage payment. But the challenge when you mentioned of helping clients and more, really more people in the teaching tax flow, ecosystem, getting them to the point where one, they understand what homeownership looks like and what they can afford. It's really, really important that they go through the preapproval process, which is different than prequalified.
Speaker 5:I'd love Brendan to touch on that because those are terms that and you the mortgage shop does an amazing job of explaining that. But, because you want to make sure you understand what you can afford before you start shopping for a property.
Speaker 2:And, Brett, I'm sure your eyes just lit up when you heard that comment. So so, yeah, walk us through that a little bit on little bit on your end. So kind of piggybacking off what Chris was mentioning there and and really just getting things in a sense, getting things in order. Right? So what does what does it look like on the lender side of things?
Speaker 4:Yeah. So if you guys are, like, trying to frantically write down what we're saying, don't because I go over this everything in mortgage prep one zero one every Wednesday at 11AM eastern. They'll put the links in the in the description of the podcast for you guys to join that, and I'll go over all of this in detail. You won't have to memorize any of it. But prequalification versus preapproval, prequalification is basically, worth the paper that it's written on.
Speaker 4:It's based off of what you state your income is. It's based off of what you state your assets are. We can do what's called a soft credit pull, which isn't a hard credit pull, which may not pull all your debts in. So it's it's basically stated debt. And I do not like doing those, usually, or primary residences or full doc, investment properties, which means going off your debt to income ratio.
Speaker 4:Because I'm an investor as well, and the last thing I want you to do is go under contract for property and then realize you actually don't qualify. So we do what's called a true preapproval, not a prequalification, a preapproval. We run your credit. We verify assets. We manually underwrite your income to know that, like, if we give you that letter, it's gold.
Speaker 4:You're done. You're good. Unless you go out and buy a Ferrari without us knowing, you know, that that mortgage process is gonna be very seamless for you.
Speaker 5:Let me ask this question a lot, and I get this sometimes. When some and I I wish I knew what I knew when I bought my first home, and I didn't know what the heck I was doing. Yet when your credit is pulled, first of all, you what are some maybe a two or three tips? And again, I I strongly encourage anyone listening to go to the the mortgage prep course. But what is two or three tips that they should know about their credit report before they apply?
Speaker 5:And how long is that credit report valid, in that qualification and potential closing process?
Speaker 4:Yeah. So a lot of people don't, you know, go to Credit Karma. That's not accurate. Your credit score the credit bureaus and the credit scores that we pull are different than credit card companies pull, are different than what Credit Karma shows and what different than, actually, auto loaners pull. You may have, like, an 812 credit score on Credit Karma, but your credit score actually be, like, 735, or 720 with a normal hard credit pool from the three credit bureaus, which are Experian, Equifax, and TransUnion.
Speaker 4:We take the middle number out of all of those. So if, like, one's 800, one's 798, and one's 812, the middle number would be 800. So your your credit score would be essentially 800 for that loan. So just know that, that is not an accurate credit score. If you want a act accurate credit score, obviously, you can ask your loan originator that's pulling it or go to freecreditreport.com.
Speaker 4:You do get one free credit report per year. Don't do high balances. If you are trying to increase your credit, don't max out your credit cards. If that's your number one goal, I would say, get a small credit card, maybe with, like, a thousand dollar limit or something like that. Put groceries on it.
Speaker 4:You know, pay it down to 25% of the, max amount per month and keep a balance on it because guess what? Credit cards don't make money unless you, pay interest on it. So it looks better for you to have a little bit of a balance on there. So the credit card company is winning, your credit score is going up, and you're winning, everybody's winning. So just keep that in mind.
Speaker 5:That's a great tip because your credit score can greatly affect not only what you're eligible for, but your your credit or rather your interest rate, which ultimately affects what you can purchase.
Speaker 4:Yeah. So interest rate also goes off of credit score. So your debt to income ratio may be a little tight. If you have a lower credit score, then it it may determine if you're gonna be able to buy that property in your price range or not. So you just definitely wanna wanna keep a check on that.
Speaker 4:If you want any tips or or tricks of what to do to increase your credit score, we can also kinda help you with that through the the mortgage process. We can't just pull your credit for no reason. You do have to be applying for a loan, but we can, look at your credit report and and kinda give you advice on what to pay off first to increase your credit score.
Speaker 2:Excellent. Excellent advice. And so here's a question, actually, again, for both of you. Say somebody was self employed, and they just love writing stuff off. Right?
Speaker 2:Every every possible thing they I and I know both of you are probably like, oh, jeez. Not not this clown. Writing everything off. Right? And they sell, well, when the time comes to for me to buy a home, I'm I'll be fine.
Speaker 2:Like, things are gonna be better in the future. Right? Everybody thinks that unless you're a negative Nancy and he thinks things are gonna be worse, then he got bigger problems. But for the most part, how does that really affect things down the road? So say you had, Johnny Appleseed over here.
Speaker 2:One year, he's works for himself, does fairly well, but takes every single I mean, he's, again, writing off everything. Every deduction pays very minimal in tax. And then three years later, goes to start a family, realize he needs to purchase a home. The apartment or condo he's in is no longer suited for him. How does that look?
Speaker 2:So I I imagine there's some some big challenges in that process.
Speaker 4:So yeah. So, I mean, there's we're all about trying to utilize things on your your tax return to to increase your income or decrease the amount you owe to the IRS. Right? And there's a happy medium with that. You can claim things as expenses and things like that if you're self employed on your tax return.
Speaker 4:But if you do that, keep in mind that it will decrease what your income is showing. So I get a lot of clients that are self employed and be like, I need 800,000 last year. And I'm like, well, I feel like Jerry Springer. I'm like, well, the the note says that that's a lot because after I after I do your income analysis, you're making, like, 50,000 a year, which is crazy. I mean, that's a big that's a a big example.
Speaker 4:But, yeah, if you claim a lot of stuff on your tax returns and expenses, you know, and amortization, casualty loss, things like that, it decreases what your actual income is. And people are like, well, how do I know that? Well, you can, you know, come to your loan originator if they're proficient in tax returns, which I am. And we can do that income analysis for you to let you know what your true self employed income is. If you're w two, you really don't have to worry about it unless you do have a side hustle that's a a self employed job.
Speaker 4:But if you're w two, we take the gross of that. You know? But if it's self employed, then we have to take into consideration what you've claimed on your taxes so you don't have to pay much to the IRS. You can't have your cake and eat it too. You're gonna get hit somewhere, whether it be owing to the IRS or not showing enough income on your tax return to qualify for that mortgage.
Speaker 2:And that's where it yeah. I I'm gonna make the assumption where it's a much better relationship going to an originator such as yourself versus going I mean, nothing against them, but, like, straight to a bank. Right? Like, it's my experience with them is they're very binary. It's either you are, you aren't.
Speaker 2:There's not a There's no gray area. But yeah. Yeah. Yeah. There's no in between.
Speaker 2:That's a great way to put it. So
Speaker 4:I mean, I used to work for a bank, but the thing is before I got to the bank, I interned at a, mortgage company, and the mortgage company was actually ran by a CPA. So I learned taxes very well, early on in my career. I will preface some there's very few, maybe, like, one to 2% at a bank that knows what they are doing. I, fortunately, was able to be in that because I was taught, Will. But bank loan originators aren't they don't have to be licensed.
Speaker 4:They don't have to pass tests. They don't have to, you know, know really what they're doing first, versus us. We we do. We have to be licensed. We have to take that test.
Speaker 4:We know what tax returns are. Any good loan originator should know how to read tax returns. I see so many and this is, like, a different topic, but just giving accelerated depreciation as an example on rental income. I see so many, people loan originators in these groups like, hey. They're not qualifying because they claimed accelerated depreciation.
Speaker 4:I'm like, well, you can add that back in. You're supposed to add that back in. And it it really could make or break your deal if you don't work with a loan originator that that knows how to read and, delve into tax returns to do that income analysis for you.
Speaker 5:That's a question I have from coming from the tax world, and we really do try to talk to our clients. Now from the first time home typically a first time home buyer is not necessarily gonna have a lot of rental properties, but, Bradley, I did touch on that when let's say someone's self employed, just straight, schedule c, they're reporting their income on schedule c, or let's say they bought a new vehicle, and they took a big depreciation deduction on the vehicle, or they take the home office deduction. What type of expenses can be added back to your income when when you're considering your debt to income ratios For someone that's self employed, obviously, the w two people, from a from a tax perspective, that's not a good situation because you don't get any deductions, you're taking tax on your gross income, but from a mortgage standpoint, it's apparently safer. But from someone self employed, what can they add back and what could be when they reconstruct their income? Yeah.
Speaker 4:So if you're doing Schedule c, remember you do have to have a two year two years of your tax returns to qualify for that income. You can add back in any amortization, casualty loss, depreciation. And then if you have a one time extraordinary expense on your schedule c, that means you didn't claim it the year before. I see so many tax returns. It says one time expense, and it's like, I don't know, this, like, ticketing sales.
Speaker 4:And then the next year, it says one time expense. Ticketing sale. Well, that's not a one time expense. Now we have to count that into your expenses, which takes away from your income. So just keep that in mind.
Speaker 4:If it is true, one time expense like you you did buy a car and you broke it off and that's your one time expense, that's fine, but it will take out from your total income because it will add to your expenses for that year, but we don't have to count it, you know, if it's outside of that outside of that realm for the one year. If it's on there for two years, it's the same thing. We're counting it against your income.
Speaker 5:Ange, do you recommend someone put on there one time expense, or is it something that they explain with maybe a letter or something like that after the fact, you know, from their I
Speaker 4:would prefer them to put on their one time expense because then I would ask them and their because if not, I'd have to come to you, their their their CPA, and be like, hey. I need a letter from you saying that this was a one time expense. Otherwise, it's gonna be counted as a true expense, and we'll deduct their income. So I would love for it to say one time expense. If it's a true one time expense, I don't like to see two tiers tax returns, the same CPAs, like, one time expense, ticketing sales, 2,023, ticketing sales.
Speaker 4:I'm like, no. That's the same expense. Like, yeah. Can't do a one time expense on that.
Speaker 5:That's something they consider that two year rule where, you know, that income's gonna for the count, needs to be on the tax return. What about someone that, and I know we've only got a couple more minutes left here, but, you know, especially people that are that are self employed and and their business is growing and they they might elect to be taxed as an s corporation. If it's the same LLC and they just changed how they're taxed, do they have to restart that two year clock or or can they use the last two years?
Speaker 4:No. They don't have to start that two year clock. And, again, you need to work with somebody, a loan origin here, that knows tax returns and knows what they're doing because self employed is self employed whether you file it on a Schedule c or an s corp or a c corp partnership, any time like that. We just have to average it out. So we do a different calculation for Schedule c than an s corp or a partnership, things like that, and then we just take both of those calculations, put it together, and average those two incomes out divided by, like, 24 to get that average monthly income.
Speaker 4:So you don't have to. You just if you wanna make that switch, try not to keep making that switch. Make it because it's really beneficial for you and the state that you're in for your company.
Speaker 5:Right. And any final one or two tips and or tricks? I know, you know, sometimes someone's considering purchasing a home, maybe they're considering a job change and they might just wanna hold off on that job change, if they're in the middle of a transaction, maybe I'm just overthinking it, but I any one or two things our listeners could take away in preparation to, coming to the mortgage prep one zero one. And I would say even if you have a mortgage, if you're thinking about buying another house or relocating, there's nothing wrong with preparing yourself because you want to get the best terms possible.
Speaker 4:Couple tips, and I'll try to go through them really fast and I'll delve into it more on another episode or in mortgage prep one zero one. But if you are wanting to let's say you have cash under your mattress and you want to use that as part of your down payment, you need to let any type of income or any type of assets that you're wanting to deposit that you can't source the paper source paper trail. You want to, deposit that in there and let it season, which means sit for sixty days at least so it won't show as a large deposit. If it shows as a large deposit and you can't show a paper trail, you will not be able to use that, as a down payment for closing costs or for your down payment. Second, you don't have to be a first time homebuyer to do an FHA loan.
Speaker 4:A lot of people think it means first time homebuyer. It means Fair Housing Act. It's a government loan. However, you can't just have you can't have two FHA loans at the same time. You can have one, then you can refinance out of that if you want to.
Speaker 4:Go get another one. It's not one and done. That's not what FHA means. So you can do multiple FHA's. You just can't have more than one at the same time.
Speaker 4:Don't go out and, quit your job during the loan process. If you do that to me, I will find you. I'm kidding. Kinda. Not really.
Speaker 2:But Yeah. She's not kidding. Got all you guys. She is not joking at all. So Well, you'll have well, you'll you'll have all their, you know, valuable information before they get to that point.
Speaker 2:Right?
Speaker 4:You won't taken movie by a five foot mortgage person because they quit their job and went to Spain. And that's it. Those are my my facts. And then you can make income from your primary residence as my last fact, and I'll leave that as a cliffhanger for you guys, to learn more about mortgage prep. We're on another episode of how you can do that and become an investor and a from a first time home buyer to an investor.
Speaker 4:Awesome.
Speaker 2:Well, if that is our space to interest Pete, you've got bigger problems again. You're you got some stuff going on. But, Brenda, thank you for for jumping back on with us. It's it's been a while. I know we talk to you very often because we're always picking your brain and, you know, you
Speaker 4:know, Chris time he don't wanna hear from me, but, yes, you talk to me.
Speaker 2:Oh, I mean, you've talked been talking about. You should I talk to Chris every day. You think I wanna hear from his bug all the time? No. No.
Speaker 2:Not at all. But but, again, thank you for joining us on this. As Brent had mentioned, we'll definitely drop the link below in the show notes for this one, for mortgage prep. And until next time, everybody enjoy. Send over those questions, and we'll see everybody soon.
Speaker 2:Hey, everybody. John Topolsky from the Teaching Tax Flow team still here. Thank you, Brenna Carls from The Mortgage Shop for joining us on this show, jumping into a lot of the tips, tricks, and really just looking at the whole process from your point of view as someone who is in this all day long. So, your insight is very valuable to ourselves as well as our listeners. So, thank you for your time, knowledge, and actually, if you haven't had a chance, anyone who's listened to this, be sure to go on social media, multiple channels, check out the mortgage shop, great information on there from Brenda and her team.
Speaker 2:But even so we did drop the link in the show notes for her mortgage prep one zero one, which you can sign up for. I believe it's a quick forty five minutes ish. A zoom meeting that maybe once a week. So we urge you to check that out as well as hop onto defeatingtaxes.com. That's our private Facebook group here, Heating Tax Flow.
Speaker 2:Send over any questions you might have, any topic ideas. I know Brenna is very active on there as well too. So if you did have any questions for her, feel free to drop those into the group. So until next time, thank you for listening. The content of this podcast does not constitute an offer of securities.
Speaker 2:Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum. The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney. Investment advisory services are offered through Cabin Advisors, a registered investment advisor.
Speaker 2:Securities are offered through Cabin Securities, a registered broker dealer.
