By Leonard Baron
Mortgage financing for the self-employed
Q: I am self-employed and cannot get mortgage financing because with all my deductions I show little taxable income, even though I make enough money to afford a house. Any advice on what to do? Bob C., Chicago, IL
A: Hi Bob! Yeah that is the Catch-22 of being self-employed and writing off as many expenses as possible — depreciation, home office expense, car expenses, etc. By doing this, of course, you reduce your taxable income and pay less in taxes. However, it also reduces the amount of mortgage financing you can obtain because the banks look at your tax returns to see how much you earned the prior year. For underwriting purposes, they go off what you reported as income.
And that’s the Catch-22: If you take more deductions and pay less in taxes, then you cannot get financed. If you use the opposite approach and take fewer deductions, then you can up your financing amount, but you’ll pay more in taxes.
And now you can make your choice.
HOA special assessments
Q: My HOA fees keep going up, and now we’ve been told there will be a special assessment on all the community units to replace the roof. I pay my fees each month, so why is there a special assessment needed? Val P., Miami, FL
A: Oh the dreaded special assessment. Your HOA fees pay for both normal year operating expenses — think gardening, electric costs, water — and for long-term capital repairs such as roofs, streets and painting the complex. Most of the time, the HOA fee set by the board of directors is enough to pay for operating expenses and save some money — but not enough — for those capital repairs. So when those repairs are needed, like your roof, there isn’t enough money to pay for them. The HOA divides the amount it is short by the number of units in the community and issues a special assessment.
HOAs could avoid special assessments by just increasing the monthly fees to save more money. But most owners would then complain that fees are too high, so the boards set a lower monthly amount that just isn’t enough to save for capital repairs. And again, that’s why you have special assessments when those repairs come due.
Leonard Baron is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.
Email Your Questions to: Leonard@ProfessorBaron.com