Buying A Home Strategically with Kyle Seagraves

Katelyn Magnuson: 00:00:15

Welcome back to the confident money podcast.

Katelyn Magnuson: 00:00:17

I'm your host, Caitlin Magnuson.

Katelyn Magnuson: 00:00:19

And this is episode five with our guest Kyle Seagraves.

Katelyn Magnuson: 00:00:24

Kyle is a certified mortgage advisor, licensed loan originator,

Katelyn Magnuson: 00:00:28

and the owner of win the house.

Katelyn Magnuson: 00:00:29

You love a YouTube channel with over a hundred thousand subscribers.

Katelyn Magnuson: 00:00:33

Kyle, I feel like you don't even need to be welcomed back at this point.

Katelyn Magnuson: 00:00:36

You're just existing as a part of the show.

Katelyn Magnuson: 00:00:39

Um, so thank you for being here.

Katelyn Magnuson: 00:00:41

And I know today.

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We were gonna talk about the, you know, strategy around

Katelyn Magnuson: 00:00:45

buying and selling a house.

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And we're also going to touch on some self-employed tips because I know a lot

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of our listeners are self-employed or looking to be self-employed in the future.

Katelyn Magnuson: 00:00:54

So welcome back.

Katelyn Magnuson: 00:00:56

Let's kick it off.

Kyle Seagraves: 00:00:57

Yeah.

Kyle Seagraves: 00:00:58

I feel like if I wasn't welcome at this point, we probably

Kyle Seagraves: 00:01:00

wouldn't have this many episodes.

Katelyn Magnuson: 00:01:01

Fair.

Kyle Seagraves: 00:01:03

um, yeah.

Kyle Seagraves: 00:01:04

You know, I, when people are buying a house like they're spending.

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More money than they ever have before.

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And of course, that's going to, that's gonna trigger that thing in our brain.

Kyle Seagraves: 00:01:13

That's like, um, what are all of the risks?

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And I need to make sure I have answers to all these things

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before I move forward with this.

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Otherwise, that very primal part of us is gonna like back out, go

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back to the thing that we know.

Kyle Seagraves: 00:01:24

Um, and so.

Kyle Seagraves: 00:01:27

I think that's kind of our goal for this episode is to just really touch on

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what are some of those things that get triggered in us that make us well and say,

Kyle Seagraves: 00:01:33

actually, I wanna go back to the thing that felt more safe and secure because

Kyle Seagraves: 00:01:37

I, the more familiar with it when we get into the unknowns, we start to say, uh,

Kyle Seagraves: 00:01:42

get me outta here as quickly as possible.

Kyle Seagraves: 00:01:44

Um,

Katelyn Magnuson: 00:01:44

Yes.

Kyle Seagraves: 00:01:45

and I know we touch on a couple of those things like the

Kyle Seagraves: 00:01:47

30 year versus the 15 year, um, along with, uh, also some of the renting.

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Versus buying questions.

Katelyn Magnuson: 00:01:56

The duration that you're gonna be staying somewhere.

Katelyn Magnuson: 00:01:58

I mean, that kind of went with the renting versus the buying, but I know that the big

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one had been the, you know, opportunity cost of, okay, so you've bought,

Katelyn Magnuson: 00:02:08

but maybe the market has fluctuated.

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You know, what, what does that look like when the market fluctuates?

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We've seen an appreciating market for quite some time now.

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And so if you buy in, there's a very good chance you're gonna be selling for

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higher than you've purchased, but with, you know, the market changing, what does

Katelyn Magnuson: 00:02:22

that look like if you buy in and you need to sell two years from now, but

Katelyn Magnuson: 00:02:27

your home's actually valued at less.

Kyle Seagraves: 00:02:29

Yes.

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That is a huge concern, especially with a market that we're in now, where we're

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growing from seller's market, where sellers have the control prices are higher

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into what looks like more of a buyer's market now where buyers have control

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over terms, um, and negotiating power.

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And usually prices tend to.

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Flatten out a little bit and potentially decline.

Kyle Seagraves: 00:02:48

Um, first I think it's really helpful to remember why do I wanna

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buy a home in the first place?

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for most people they're buying a home because they want

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to enjoy where they live.

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They wanna have a nice place to either work or to sleep or, uh, to

Kyle Seagraves: 00:03:01

cook meals and have friends over, uh, not to squeeze the most profit out.

Kyle Seagraves: 00:03:05

And I, I don't believe that every single thing we do in life has

Kyle Seagraves: 00:03:09

to be squeezing every single.

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Out of all of our decisions.

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And so home buying can be something that you spend money on, uh,

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or lose money on and it'd still be fine because you enjoyed it.

Kyle Seagraves: 00:03:20

Cuz that's kind of what life is about is actually enjoying things, right.

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and not just, uh, you know, being a machine for money.

Kyle Seagraves: 00:03:29

So it's okay.

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If everything we do, doesn't like ultimately, uh, bring,

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create the most profit for us.

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If you are looking in a house like in a market like this, and let's

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say we bought a home for $400,000 and what happens if we see prices

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decrease over the next few years?

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Well, our really good thing to do is look at what's happened historically

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when there's been price declines, historically, uh, the past few declines

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that we've had have only lasted three years, meaning that if you bought a

Kyle Seagraves: 00:04:01

home and waited three years before you sold it, you would've broke.

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That's not a terribly long time to wait in home.

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Even in the biggest decline when we had the 2008 housing crisis, that

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was a decline of six years before it were covered back to the same period.

Kyle Seagraves: 00:04:18

So if you bought a home for $400,000 at the height of, uh, home prices,

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uh, right before the housing crash, let's say we bought it for 400,000.

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If you waited six years in that home and then sold it, that you would've

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been able to sell it for $400,000.

Kyle Seagraves: 00:04:34

so you didn't lose any money unless you sold at the decline.

Kyle Seagraves: 00:04:38

Um, now if you do sell a home, uh, within a short period of time, this is where

Kyle Seagraves: 00:04:44

home buying, uh, does have like a lack of flexibility to it compared to renting.

Kyle Seagraves: 00:04:49

Because with renting, I can tell my landlord and say, Hey, I'm

Kyle Seagraves: 00:04:52

actually gonna be leaving in 30 days.

Kyle Seagraves: 00:04:55

Best of luck.

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uh, or 60 days or whatever they want from you.

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Um, before you leave and then you go somewhere.

Kyle Seagraves: 00:05:02

With the buying, you do have to put it on the market and sell it or rent it.

Kyle Seagraves: 00:05:07

Um, and if you are selling within a short period of time, you do run the risk of.

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Either breaking even, or actually having to bring money to the

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closing table to sell the home.

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And this would happen if you, uh, let's say we bought the home for

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$400,000 and in two years we wanna sell it and maybe we can only sell

Kyle Seagraves: 00:05:26

the home for, uh, let's say $405,000.

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So went up in value a little bit.

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But when you close on a home, you also pay closing costs.

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Most of the time people pay 6% for both their realtor and

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the buyer's realtor combined.

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So 3% for each, and then there might be some property taxes or some

Kyle Seagraves: 00:05:46

other closing costs like title or transfer taxes when you sell the home.

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And so in those instances, it's possible that if you need to sell home within

Kyle Seagraves: 00:05:54

a short period of time, that you could have to bring money to the closing.

Kyle Seagraves: 00:05:58

That risk becomes less and less as you stay in the home for longer.

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And like we talked about on a previous episode, that's why it's

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usually beneficial to buy a home.

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Only if you know, you're gonna stay in there for three plus five plus

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years because you don't run that risk anymore of, uh, the appreciation,

Kyle Seagraves: 00:06:15

not covering the cost to sell.

Katelyn Magnuson: 00:06:18

Yeah, I think that that's something that can

Katelyn Magnuson: 00:06:19

be really scary for people.

Katelyn Magnuson: 00:06:20

I know that's something that I bought right after, you know,

Katelyn Magnuson: 00:06:23

the 2008 collapse we'll say.

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And it was really, there was a lot going on at the time where,

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you know, people were selling or people were underwater and.

Katelyn Magnuson: 00:06:32

You know, we'll, we'll talk about this more in the next episode, but

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I also, I want people to understand that, Hey, if you're going into

Katelyn Magnuson: 00:06:39

this understanding that yes.

Katelyn Magnuson: 00:06:41

You know, it's, it's a purchase, it's an investment.

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There is risk associated, right?

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Just like with buying a car, doing anything else.

Katelyn Magnuson: 00:06:48

It's just a little bit larger and.

Katelyn Magnuson: 00:06:51

But it can also be really, I feel like very secure if you know, that

Katelyn Magnuson: 00:06:53

you're able to stay somewhere or maybe instead of like, let's say given that

Katelyn Magnuson: 00:06:58

example, and I know that this has happened a lot, especially with the

Katelyn Magnuson: 00:07:01

prior, you know, housing market issues that had occurred, people that were,

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you know, underwater on their homes, meaning they owed more than it was

Katelyn Magnuson: 00:07:07

worth, or maybe even they didn't owe.

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They were able to sell for more, but with closing costs, with everything that goes

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into that, they were going to need to bring cash to closing, which they may not

Katelyn Magnuson: 00:07:16

have because they may have been counting on that sale and the equity that they

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had built and the appreciation that was.

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To provide them with the profit that they needed.

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So just because I know a lot of people here can think worst case

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scenario, or like you said, kind of wanna know all the answers.

Katelyn Magnuson: 00:07:32

You know, one of the options that I had been made aware of is looking

Katelyn Magnuson: 00:07:35

at, you know, renting your home or what can you do if you had to leave?

Katelyn Magnuson: 00:07:39

And it was short and maybe even, and I know that this has happened,

Katelyn Magnuson: 00:07:43

maybe even you can't rent your house for what your mortgage payment is.

Katelyn Magnuson: 00:07:47

Maybe you're a couple hundred dollars a month shy.

Katelyn Magnuson: 00:07:50

But you're looking again at the financial cost of is having to bring a couple

Katelyn Magnuson: 00:07:54

hundred dollars to the table to, you know, keep this mortgage here and to keep

Katelyn Magnuson: 00:07:58

this home Intel values appreciate again, or the market has a chance to recover.

Katelyn Magnuson: 00:08:03

So I just didn't know if you had any other thoughts on, you know, options

Katelyn Magnuson: 00:08:06

that people have when they are looking at the worst case scenario, not to

Katelyn Magnuson: 00:08:09

dwell there, but just to provide.

Kyle Seagraves: 00:08:11

Yeah, renting is probably the best solution in that instance,

Kyle Seagraves: 00:08:15

if you're like, I am, I wanna sell, but selling is going to cost me money.

Kyle Seagraves: 00:08:18

Um, you could also looking at doing a, for sale by owner.

Kyle Seagraves: 00:08:21

Um, there's tons of YouTube videos and solutions to that.

Kyle Seagraves: 00:08:25

if you need help doing that, because that could save you some money at the

Kyle Seagraves: 00:08:27

closing table, but if you're at that point where you're like, I need to sell.

Kyle Seagraves: 00:08:31

I'm gonna have to bring money to the closing table because the

Kyle Seagraves: 00:08:34

value decreased or the costs for, to close are higher than, uh, you

Kyle Seagraves: 00:08:38

know, what I made on the home.

Kyle Seagraves: 00:08:40

Um, then I think renting is really the best option.

Kyle Seagraves: 00:08:44

especially like you mentioned, even if, even if you collect less

Kyle Seagraves: 00:08:48

rent than the mortgage payment.

Kyle Seagraves: 00:08:50

Likely is probably a better option than having to pay money to sell the home.

Kyle Seagraves: 00:08:54

Um, so options like that, but a lot of it too, a lot of this risk management goes

Kyle Seagraves: 00:08:59

back to when we bought in the first place.

Kyle Seagraves: 00:09:02

Um, kind of going back to those conversations about like the 30

Kyle Seagraves: 00:09:04

year versus the 15, this is why the 30 year is better because in

Kyle Seagraves: 00:09:08

those instances I'd rather have that lower mortgage payment than the 15.

Kyle Seagraves: 00:09:12

Because I'm legal, like I'm obligated to the, that higher payment on a 15 year.

Kyle Seagraves: 00:09:16

So not only that, but I also wanna make sure that when I buy a home, I'm not

Kyle Seagraves: 00:09:18

maxing out as much as I possibly can.

Kyle Seagraves: 00:09:22

Um, you know, I don't want to spend 45% just because a lender

Kyle Seagraves: 00:09:26

will approve me up to that.

Kyle Seagraves: 00:09:27

I don't wanna spend 45% of my gross income on a home because things.

Kyle Seagraves: 00:09:32

Can and will happen.

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Crazy things like a global pandemic might happen.

Kyle Seagraves: 00:09:38

And I don't wanna be stuck with a payment that feels like it is consuming

Kyle Seagraves: 00:09:43

most of my income, especially if things start to get tight economically,

Katelyn Magnuson: 00:09:48

Absolutely.

Katelyn Magnuson: 00:09:49

I could not agree more.

Katelyn Magnuson: 00:09:50

And I think that whenever possible my parents lived this way and like

Katelyn Magnuson: 00:09:55

blessed them because I bought a house three quarters of mile down

Katelyn Magnuson: 00:09:58

the road and it was not possible.

Katelyn Magnuson: 00:10:00

Um, but I grew up.

Katelyn Magnuson: 00:10:02

Being told that you should be able to pay for everything on one spouse's

Katelyn Magnuson: 00:10:05

income, if you were part of a married or, you know, partnered couple.

Katelyn Magnuson: 00:10:08

And I think that that was a great concept, especially for when they were buying.

Katelyn Magnuson: 00:10:12

But they bought a house that was twice the size of mine, three quarters of a mile

Katelyn Magnuson: 00:10:16

away, 12 years before I bought my house and they paid a thousand dollars less.

Katelyn Magnuson: 00:10:22

And I always, that was a whole lot of unpacking around my own buying power.

Katelyn Magnuson: 00:10:27

But when I was looking to purchase.

Katelyn Magnuson: 00:10:29

You know, the house that I had bought before, for me, it was looking at,

Katelyn Magnuson: 00:10:31

okay, what happens if I lose my job?

Katelyn Magnuson: 00:10:35

And I have unemployment unemployment, doesn't cover a lot, but most likely,

Katelyn Magnuson: 00:10:40

you know, kind of running through the different scenarios of what's likely.

Katelyn Magnuson: 00:10:42

And we do this with business owners a lot where, okay.

Katelyn Magnuson: 00:10:45

Let's, let's sit and think about this for a second.

Katelyn Magnuson: 00:10:48

When you're looking at the bills and what, what debt you are comfortable bringing

Katelyn Magnuson: 00:10:51

on, what is the likelihood, if you lost.

Katelyn Magnuson: 00:10:56

Three of your big clients tomorrow, or a large chunk of your income.

Katelyn Magnuson: 00:10:59

What does that look like?

Katelyn Magnuson: 00:11:00

What is the timeline to replace that income?

Katelyn Magnuson: 00:11:03

How easily can you pivot?

Katelyn Magnuson: 00:11:05

What are your options in the market that you're in?

Katelyn Magnuson: 00:11:07

And I think factoring those in with also, ideally not hitting that 45%,

Katelyn Magnuson: 00:11:12

or I think you said before, what?

Katelyn Magnuson: 00:11:13

56.9, 9% for, for some options, which we don't want.

Katelyn Magnuson: 00:11:17

That's really stressful.

Katelyn Magnuson: 00:11:19

Or could be really stressful.

Katelyn Magnuson: 00:11:21

I think that looking at your earning potential and your sort of recovery

Katelyn Magnuson: 00:11:24

potential is important as well, especially when you're considering an emergency

Katelyn Magnuson: 00:11:28

fund or those expenses that pop up, like you'd said before having to replace a

Katelyn Magnuson: 00:11:33

roof or things that homeowner's insurance doesn't cover or making sure that your

Katelyn Magnuson: 00:11:38

homeowner's insurance deductible is realistic for your financial situation.

Katelyn Magnuson: 00:11:42

Are you putting, you know, a $5,000 deductible when you don't

Katelyn Magnuson: 00:11:45

have $5,000 earmarked in savings that could go towards that.

Katelyn Magnuson: 00:11:49

Like there are things to be looking at, and maybe that means if you

Katelyn Magnuson: 00:11:52

have more volatile income or you have fewer income sources that you

Katelyn Magnuson: 00:11:56

save up a larger emergency fund before you look to buy a house.

Kyle Seagraves: 00:12:00

Yeah.

Kyle Seagraves: 00:12:01

Yeah.

Kyle Seagraves: 00:12:02

I, I think you're spot on with the emergency fund is like, I know that

Kyle Seagraves: 00:12:05

gets talked about a lot in personal finance and I, feel like people

Kyle Seagraves: 00:12:08

kind of gloss over it a little bit.

Kyle Seagraves: 00:12:10

and it's kind of really distressing to see sometimes when, like, I I've done

Kyle Seagraves: 00:12:14

loans for a lot of people who they will buy a home, but the, the amount that

Kyle Seagraves: 00:12:18

they spend on down payment, closing costs clear out their bank account.

Kyle Seagraves: 00:12:22

Like they don't have money left over after.

Kyle Seagraves: 00:12:25

Like they'll literally depend on the next paycheck to come in to

Kyle Seagraves: 00:12:28

fill their bank account with just something other than like 12 bucks.

Kyle Seagraves: 00:12:32

Uh, and so like, and I usually tell 'em like, this is maybe it'd be helpful to

Kyle Seagraves: 00:12:36

have some savings before you do this.

Kyle Seagraves: 00:12:38

Ultimately, it's not my decision.

Kyle Seagraves: 00:12:39

You're the one buying the house.

Kyle Seagraves: 00:12:41

You are a grown adult.

Kyle Seagraves: 00:12:41

You can make these decisions, but I do wanna let you know,

Kyle Seagraves: 00:12:44

like, this is, this is risky.

Kyle Seagraves: 00:12:46

Like, and I don't want you to have to depend on a credit

Kyle Seagraves: 00:12:49

card or other lines of credit.

Kyle Seagraves: 00:12:51

To cover things like the AC going out or even just the general cost of moving

Kyle Seagraves: 00:12:55

tends to be a lot more than people expect.

Kyle Seagraves: 00:12:58

Um, I was curious, what, what do you feel like is a good, like,

Kyle Seagraves: 00:13:01

could you explain the emerge?

Kyle Seagraves: 00:13:03

Like how would somebody set up an emergency fund, and how they figure out

Kyle Seagraves: 00:13:06

like how much money they actually need

Katelyn Magnuson: 00:13:08

That God, that is, that is the question that's like,

Katelyn Magnuson: 00:13:11

what kind of loan do you wanna get?

Katelyn Magnuson: 00:13:12

Right.

Katelyn Magnuson: 00:13:13

Um, there, there are so many variables that factor in, but I feel really

Katelyn Magnuson: 00:13:17

strongly that as a bare bones rule of thumb, everyone should strive

Katelyn Magnuson: 00:13:23

for three months of expenses.

Katelyn Magnuson: 00:13:27

In an emergency fund.

Katelyn Magnuson: 00:13:28

So let's say you make $6,000 a month as a household and your expenses are $3,500.

Katelyn Magnuson: 00:13:33

You'd want to have three months of those expenses, which is what I think, $10,500.

Katelyn Magnuson: 00:13:38

it's not invested.

Katelyn Magnuson: 00:13:39

It's not, you know, volatile.

Katelyn Magnuson: 00:13:41

This is stable.

Katelyn Magnuson: 00:13:42

And the reason.

Kyle Seagraves: 00:13:44

Mm.

Katelyn Magnuson: 00:13:44

I air kind of on the low side for liquid cash savings,

Katelyn Magnuson: 00:13:49

because frankly there's an opportunity cost to parking that money in a savings

Katelyn Magnuson: 00:13:53

account, even to parking that money in a high yield savings account.

Katelyn Magnuson: 00:13:56

Part of.

Katelyn Magnuson: 00:13:57

The downfall of keeping that money safe is understanding

Katelyn Magnuson: 00:14:01

that it's also not necessarily going to keep up with inflation.

Katelyn Magnuson: 00:14:03

It's most likely not at all, going to keep up with inflation so that

Katelyn Magnuson: 00:14:06

money becomes worth less every year, which is a little bit depressing,

Katelyn Magnuson: 00:14:09

but you need it to be stable.

Katelyn Magnuson: 00:14:10

You need it to be there.

Katelyn Magnuson: 00:14:12

Now, the reason that I feel comfortable starting at that three month mark

Katelyn Magnuson: 00:14:16

is because for most people, let's say that you know, that household

Katelyn Magnuson: 00:14:20

and that example that makes $6,000 someone in that household gets laid.

Katelyn Magnuson: 00:14:25

Okay, so we're gonna say the income is half.

Katelyn Magnuson: 00:14:27

So your income is $3,000.

Katelyn Magnuson: 00:14:29

Your expenses are $3,500.

Katelyn Magnuson: 00:14:31

So you're only negative $500 a month.

Katelyn Magnuson: 00:14:34

At that point, that emergency fund is going to cover you for almost two

Katelyn Magnuson: 00:14:37

years, given that example, and that's not even factoring in unemployment.

Katelyn Magnuson: 00:14:42

However, for most of us, if you take your base expenses, a lot of

Katelyn Magnuson: 00:14:47

us have things that we could cut.

Katelyn Magnuson: 00:14:48

If push came to.

Katelyn Magnuson: 00:14:49

right.

Katelyn Magnuson: 00:14:50

So taking your regular expenses now and planning for that means that

Katelyn Magnuson: 00:14:54

like I could go cut probably $250 easily out of just random things

Katelyn Magnuson: 00:15:00

that I spend or subscriptions that I have that I don't have to have.

Katelyn Magnuson: 00:15:04

If you know, I'm really tight financially.

Katelyn Magnuson: 00:15:07

Now there are people that may have, I don't know my thoughts on this.

Katelyn Magnuson: 00:15:12

I don't have children.

Katelyn Magnuson: 00:15:13

I have a separate emergency fund for my animals for.

Katelyn Magnuson: 00:15:17

Fed appointments for ACL tears, which we just experienced and get to pay for

Katelyn Magnuson: 00:15:22

again, um, that is separate from that.

Katelyn Magnuson: 00:15:25

I have, you know, this, this amount that I have for my emergency fund

Katelyn Magnuson: 00:15:28

is just for replacing my income.

Katelyn Magnuson: 00:15:30

It's not to supplement, you know, this is not a travel fund.

Katelyn Magnuson: 00:15:34

This is not anything else.

Katelyn Magnuson: 00:15:35

And for me, three months feels great because months really could be six to

Katelyn Magnuson: 00:15:39

12 or more when I think appropriately.

Katelyn Magnuson: 00:15:44

Spread out or allocated.

Katelyn Magnuson: 00:15:46

Now there are some people, maybe you are the only source of income in your family.

Katelyn Magnuson: 00:15:51

Maybe you don't have a partner, maybe you have children and you

Katelyn Magnuson: 00:15:55

don't have a partner that may look like a higher amount for you, right?

Katelyn Magnuson: 00:15:58

Because you have higher risk to your income.

Katelyn Magnuson: 00:16:01

And especially if you only have one income source, you know, for people

Katelyn Magnuson: 00:16:04

that have day jobs, that sounds great.

Katelyn Magnuson: 00:16:06

And for a lot of people, it feels really stable.

Katelyn Magnuson: 00:16:09

personally, I disagree because I've never gonna knock on wood.

Katelyn Magnuson: 00:16:12

Had all of my business income drop out from you overnight.

Katelyn Magnuson: 00:16:15

I have been laid off before and lost that entire source of income.

Katelyn Magnuson: 00:16:19

And so, again, depending on your personal risk tolerance and your financial

Katelyn Magnuson: 00:16:22

situation, I think three months of expenses is a, is a great place to start.

Katelyn Magnuson: 00:16:26

I wouldn't go higher than that.

Katelyn Magnuson: 00:16:28

I would invest any extra for myself personally, above and beyond that.

Katelyn Magnuson: 00:16:32

But for some people maybe as much as six months worth of income could make.

Katelyn Magnuson: 00:16:36

Right,

Kyle Seagraves: 00:16:36

Yeah, that's.

Kyle Seagraves: 00:16:37

Absolutely.

Kyle Seagraves: 00:16:38

What I recommend too is like three months is the fear part of my

Kyle Seagraves: 00:16:42

brain is like, that's not enough.

Kyle Seagraves: 00:16:43

I need two years worth.

Kyle Seagraves: 00:16:45

But three months is like, you'll you have a lot of that's

Kyle Seagraves: 00:16:48

three years of zero income.

Kyle Seagraves: 00:16:50

You now have a fund that is replacing, it's gonna pay for all your expenses.

Kyle Seagraves: 00:16:54

So in that, in that world, you're kinda like, oh, I, I guess I could

Kyle Seagraves: 00:16:57

take the first month as a break.

Kyle Seagraves: 00:16:59

And then I have two months to find some other way to just pay for my expenses.

Kyle Seagraves: 00:17:03

Odds are probably probably be able to figure that out pretty quickly.

Kyle Seagraves: 00:17:07

And so what it looks like when you're buying a house and reducing some of this,

Kyle Seagraves: 00:17:09

the risk of things that could happen.

Kyle Seagraves: 00:17:13

Includes when you're looking at how much the home's gonna cost, making

Kyle Seagraves: 00:17:17

sure that after you pay the cash to close amount, which is your down

Kyle Seagraves: 00:17:20

payment, plus your closing costs.

Kyle Seagraves: 00:17:22

After I pay the cash to close at minimum, I have three months worth

Kyle Seagraves: 00:17:25

of expenses left over, uh, set aside just as an emergency fund.

Kyle Seagraves: 00:17:30

Not as am I moving costs, not as furniture, not as

Kyle Seagraves: 00:17:34

like the ping pong table.

Kyle Seagraves: 00:17:35

I wanna put in the

Katelyn Magnuson: 00:17:35

Right.

Katelyn Magnuson: 00:17:35

All the fun things.

Kyle Seagraves: 00:17:37

yeah, just to say, this is.

Kyle Seagraves: 00:17:40

Worst case scenario

Katelyn Magnuson: 00:17:43

Absolutely.

Katelyn Magnuson: 00:17:44

And I think that that was, I'm not gonna call it a mistake, but I am going to call

Katelyn Magnuson: 00:17:48

it a major stressor when I bought my first house versus the situation and the lack

Katelyn Magnuson: 00:17:53

of anxiety when I bought my second house and I had that fully funded emergency,

Katelyn Magnuson: 00:17:58

you know, savings account and it was.

Katelyn Magnuson: 00:18:00

Buying a house can be stressful depending on who you are and how you operate.

Katelyn Magnuson: 00:18:03

that took one of the really big stressors out of the picture for me and allowed

Katelyn Magnuson: 00:18:08

us to weather unexpected expenses in the first couple of years and not have to

Katelyn Magnuson: 00:18:13

panic about them, or wonder how we're going to pay for them or dip into other

Katelyn Magnuson: 00:18:16

savings or retirement or things that you know, we're ideally not touching.

Kyle Seagraves: 00:18:20

Yeah, absolutely.

Katelyn Magnuson: 00:18:23

So.

Katelyn Magnuson: 00:18:24

I wanna move into the self-employed side of this, because I know a lot of

Katelyn Magnuson: 00:18:27

people are really curious and I'm always interested when we're chatting about this.

Katelyn Magnuson: 00:18:31

And, you know, a lot of people have been buying over the last few years.

Katelyn Magnuson: 00:18:33

At least a lot of our clients have been.

Katelyn Magnuson: 00:18:35

And so when it comes to being a self-employed person,

Katelyn Magnuson: 00:18:39

qualifying for a mortgage.

Katelyn Magnuson: 00:18:41

one of my biggest tips, and I think you share this, Kyle is if

Katelyn Magnuson: 00:18:45

you have a W2 a day job, right?

Katelyn Magnuson: 00:18:48

Some of your income's coming from that.

Katelyn Magnuson: 00:18:49

A lot of us, I think that started businesses were working W2 jobs

Katelyn Magnuson: 00:18:53

for quite a while, while we were getting our businesses going, my

Katelyn Magnuson: 00:18:56

biggest tip, and this feels like such a cop out is to keep that W2.

Katelyn Magnuson: 00:19:01

Especially if your business is not terribly established until you

Katelyn Magnuson: 00:19:06

qualify and can close on a house because it'll make the process so much

Kyle Seagraves: 00:19:10

Oh my, yeah, for some reason.

Kyle Seagraves: 00:19:13

And, and I agree with you.

Kyle Seagraves: 00:19:14

Like most people have never had their self-employed business.

Kyle Seagraves: 00:19:18

Like all their income just drop out, but plenty of people have been laid out from a

Kyle Seagraves: 00:19:22

job and their income disappears like that.

Kyle Seagraves: 00:19:24

So it's very confusing.

Kyle Seagraves: 00:19:26

How in the mortgage world w two income is seen as extremely stable.

Kyle Seagraves: 00:19:31

Underwriters love it.

Kyle Seagraves: 00:19:32

There's a few, very few pieces of documentation that they need to

Kyle Seagraves: 00:19:35

prove that income and everyone's comfortable with it being stable.

Kyle Seagraves: 00:19:38

On the other side, self-employment income is not seen as stable and they want a

Kyle Seagraves: 00:19:42

longer term history of seeing it income at a very stable level to be able to use it.

Kyle Seagraves: 00:19:47

Um, so the minimum there is two years.

Kyle Seagraves: 00:19:49

That's like just two years of being self-employed before they even willin.

Kyle Seagraves: 00:19:53

You getting a mortgage.

Kyle Seagraves: 00:19:55

so if you do have a W2 job and you're saying I'm eventually wanting to go

Kyle Seagraves: 00:19:58

full-time into my business, if you're at that point, it's so much easier to

Kyle Seagraves: 00:20:03

buy a house, with your W2 job than to switch becoming self-employed often

Kyle Seagraves: 00:20:08

what I see happens is people will jump into their new business full time

Kyle Seagraves: 00:20:13

because they're in that point where they're like financially, they're

Kyle Seagraves: 00:20:15

able to do that and that's fantastic.

Kyle Seagraves: 00:20:17

But then they say, I want also buy a house.

Kyle Seagraves: 00:20:20

Okay.

Kyle Seagraves: 00:20:20

Well, the minimum to buy house is two years of being in business.

Kyle Seagraves: 00:20:24

Self-employed the only way around that.

Kyle Seagraves: 00:20:29

Is if you have prior work history.

Kyle Seagraves: 00:20:31

So the way this would work is let's say you're a graphic

Kyle Seagraves: 00:20:33

designer and you earn a W2 income.

Kyle Seagraves: 00:20:35

So you've been doing that for a couple years.

Kyle Seagraves: 00:20:37

Great.

Kyle Seagraves: 00:20:38

Then all of a sudden you switch over into, uh, 10 99 work, and now

Kyle Seagraves: 00:20:42

you're a freelance graphic designer.

Kyle Seagraves: 00:20:44

You have your own business and you're making maybe a similar amount

Kyle Seagraves: 00:20:47

or maybe more income, and you have done that for one year minimum.

Kyle Seagraves: 00:20:51

You can then get past the two year mark because you were a graphic designer before

Kyle Seagraves: 00:20:56

and now you're still a graphic designer.

Kyle Seagraves: 00:20:57

You just went from w two to 10 99.

Kyle Seagraves: 00:21:00

However, if you completely shift, let's say you're a graphic designer,

Kyle Seagraves: 00:21:03

w two, and then you all of a sudden you started a lawn care business and

Kyle Seagraves: 00:21:08

you've been doing that for a year.

Kyle Seagraves: 00:21:09

You can't use that income cuz an underwriter's gonna look at that.

Kyle Seagraves: 00:21:12

And you've been, you've been in business for one.

Kyle Seagraves: 00:21:14

How do we know that that is stable and to an underwriter and to lenders, they

Kyle Seagraves: 00:21:18

view, the company as being more stable than the individual earning the money.

Kyle Seagraves: 00:21:24

So that's why with the w two, they kind of imagine they almost like assume that the

Kyle Seagraves: 00:21:29

business you work for is extremely stable.

Kyle Seagraves: 00:21:31

When most people kind of know that's usually not true.

Kyle Seagraves: 00:21:35

uh, but when you start your own business, they're like, oh, this is a new business.

Kyle Seagraves: 00:21:38

We don't know if this is gonna make money.

Kyle Seagraves: 00:21:41

You know, a long period of time.

Kyle Seagraves: 00:21:43

And the underwriter's job is to make sure that the income they approve you

Kyle Seagraves: 00:21:46

with now has a likelihood of continuing

Katelyn Magnuson: 00:21:49

Mm-hmm

Kyle Seagraves: 00:21:50

Cause if you're getting a 30 year mortgage, they're not anticipating

Kyle Seagraves: 00:21:53

what your job is gonna be in 30 years.

Kyle Seagraves: 00:21:55

Uh, but what they like to see is will your income likely continue for the

Kyle Seagraves: 00:21:59

next three years is what mortgage underwriters are usually looking for.

Kyle Seagraves: 00:22:03

It's a continuance of three years.

Kyle Seagraves: 00:22:05

So a business that only started for one year, like statistically, it's

Kyle Seagraves: 00:22:08

not gonna continue for the next three.

Kyle Seagraves: 00:22:10

They need a two year minimum self-employed history.

Kyle Seagraves: 00:22:14

So once you have the history requirement, then figuring out what income they're

Kyle Seagraves: 00:22:19

gonna be using is a completely different scenario because your first

Kyle Seagraves: 00:22:23

year let's say your business only made 30,000 and then the next year

Kyle Seagraves: 00:22:28

let's say your business made 150,000.

Kyle Seagraves: 00:22:31

A lot of people are like, great.

Kyle Seagraves: 00:22:32

I I've been making a, a ton of money.

Kyle Seagraves: 00:22:34

We can now use, you know, 10 or $11,000 per month as what

Kyle Seagraves: 00:22:39

I can qualify on a home for.

Kyle Seagraves: 00:22:41

And if you're in that spot, even from like a risk management perspective,

Kyle Seagraves: 00:22:44

I would say, probably not.

Katelyn Magnuson: 00:22:46

Yeah,

Kyle Seagraves: 00:22:46

like your business grew a lot and like maybe we

Kyle Seagraves: 00:22:48

don't all of a sudden bring up our expenses the same amount.

Kyle Seagraves: 00:22:51

Um, you know, there's some risk management in there as a being self-employed of like,

Kyle Seagraves: 00:22:56

yeah, the business grew that one year, but we don't know that's gonna continue.

Kyle Seagraves: 00:22:59

And underwriters look at it the same way you had a, a second really good

Kyle Seagraves: 00:23:03

year, but is that gonna continue?

Kyle Seagraves: 00:23:06

So far there hasn't been a lot of stability.

Kyle Seagraves: 00:23:07

We went 30 to one 50 and you know, in a business owner's head they're

Kyle Seagraves: 00:23:11

like, and next year's gonna be 300 in an underwriter's head.

Kyle Seagraves: 00:23:15

They're like, and next year's gonna be.

Kyle Seagraves: 00:23:17

So underwriters are more pessimistic.

Kyle Seagraves: 00:23:19

Business owners tend to be a little more optimistic.

Kyle Seagraves: 00:23:21

So what ends up happening in those situations is the underwriter

Kyle Seagraves: 00:23:25

usually is not going to just use the one 50 a year income.

Kyle Seagraves: 00:23:29

They're either going to pull an average of the two and that's a

Kyle Seagraves: 00:23:32

good role thumb for self-employed.

Kyle Seagraves: 00:23:34

Uh, people is to look at past two years of income as an average, likely

Kyle Seagraves: 00:23:39

what's gonna happen in the situation is the underwriter's gonna default more

Kyle Seagraves: 00:23:42

towards a lower income than the average.

Kyle Seagraves: 00:23:44

because that first year was so much lower than the second year.

Kyle Seagraves: 00:23:48

So then often what they'll do is they'll ask for a supplemental year

Kyle Seagraves: 00:23:52

to date, profit, and loss to see, okay, what is the income now trending?

Kyle Seagraves: 00:23:55

We saw first year tax return, second year tax return.

Kyle Seagraves: 00:23:58

How is income looking now?

Kyle Seagraves: 00:23:59

Is it, is it higher?

Kyle Seagraves: 00:24:01

Maybe we can default to an average, is it lower?

Kyle Seagraves: 00:24:04

Maybe we're stick, gonna have to pull back to a lower income.

Kyle Seagraves: 00:24:07

Um, and unfortunately there's not super solid.

Kyle Seagraves: 00:24:09

Uh, like I can't just give you a really basic.

Kyle Seagraves: 00:24:12

Rule to use, uh, because the income calculations are so

Kyle Seagraves: 00:24:16

much more complex than that.

Kyle Seagraves: 00:24:18

And often can be up to the underwriter's discretion on what they feel is going

Kyle Seagraves: 00:24:23

to be, an acceptable income to use.

Kyle Seagraves: 00:24:26

Because if we think about the underwriter, when they're looking at

Kyle Seagraves: 00:24:29

your income underwriters, actually, aren't really just thinking like, do

Kyle Seagraves: 00:24:33

I want to give John an approval or.

Kyle Seagraves: 00:24:36

That's how we think.

Kyle Seagraves: 00:24:37

They think like they're just sitting there wanting, gimme a thumbs up or

Kyle Seagraves: 00:24:39

thumbs down in reality, they're going to take your loan and they're going

Kyle Seagraves: 00:24:43

to sell it on the secondary market.

Kyle Seagraves: 00:24:44

That's what happens for 80 plus percent of loans.

Kyle Seagraves: 00:24:47

They get sold to, institutions like Fannie Mae or Freddie Mac.

Kyle Seagraves: 00:24:51

And they're the ones who make the rules for these loans.

Kyle Seagraves: 00:24:53

And so the underwriter, what they're thinking is when a Fannie

Kyle Seagraves: 00:24:56

Mae auditor comes in here and they look at the loan and they're like,

Kyle Seagraves: 00:25:00

you approved John with $150,000.

Kyle Seagraves: 00:25:05

but he made $30,000 last year.

Kyle Seagraves: 00:25:08

Tell me how that makes sense to you.

Kyle Seagraves: 00:25:11

And the underwriter has to sit there and be like, um, that's a great question.

Katelyn Magnuson: 00:25:14

Mm.

Kyle Seagraves: 00:25:15

and like that underwriter can actually be

Kyle Seagraves: 00:25:17

penalized for things like that.

Kyle Seagraves: 00:25:18

So that's the mindset that a underwriter is going through is mores.

Kyle Seagraves: 00:25:22

What is what looks stable to somebody completely outside third

Kyle Seagraves: 00:25:27

party who, expects, you know, is gonna take on the risk of this.

Kyle Seagraves: 00:25:32

and so that ultimately is, is kind of what you're looking at two years is to

Kyle Seagraves: 00:25:36

your average is a good role of thumb.

Kyle Seagraves: 00:25:38

but it really can change, especially when you have big changes, your income.

Katelyn Magnuson: 00:25:43

Absolutely.

Katelyn Magnuson: 00:25:44

No, and I, I think that so many of the business owners, I know that we

Katelyn Magnuson: 00:25:47

work with will see explosive growth.

Katelyn Magnuson: 00:25:49

Like you just said, you know, you'll have a $30,000 a year and then $150,000 a year.

Katelyn Magnuson: 00:25:53

And.

Katelyn Magnuson: 00:25:54

Ideally, you're on track for what, a $500,000 year, you

Katelyn Magnuson: 00:25:57

know, who knows the next year.

Katelyn Magnuson: 00:25:59

And that's great, but there's also, there's just not a track

Katelyn Magnuson: 00:26:01

history, cuz it could be that you have a $30,000 year, $150,000 year.

Katelyn Magnuson: 00:26:05

It all burns to the ground.

Katelyn Magnuson: 00:26:06

You have a $50,000 year, you know, year three.

Katelyn Magnuson: 00:26:09

And so yes, your income hasn't necessarily completely dropped out, but

Katelyn Magnuson: 00:26:14

you're also not making $150,000 a year.

Katelyn Magnuson: 00:26:17

And I think when we look at.

Katelyn Magnuson: 00:26:19

I know from the tax side, we're always looking at claiming as

Katelyn Magnuson: 00:26:22

many deductions as we can, right?

Katelyn Magnuson: 00:26:23

Because anything that you could take to reduce your business income reduces

Katelyn Magnuson: 00:26:28

your overall taxable income, which reduces the taxes that you have to pay.

Katelyn Magnuson: 00:26:32

And no one necessarily wants to pay more in taxes, especially if you,

Katelyn Magnuson: 00:26:35

you know, can illegally avoid them.

Katelyn Magnuson: 00:26:38

And so with that, I know we had chatted and that there are some

Katelyn Magnuson: 00:26:43

deductions that can be added back in.

Katelyn Magnuson: 00:26:44

Right.

Katelyn Magnuson: 00:26:44

So you're, self-employed, let's just say that you've been in business

Katelyn Magnuson: 00:26:47

for five years, you know, you've had relatively consistent growth or income,

Katelyn Magnuson: 00:26:51

or, you know, you're able to see a reliable pattern for someone and they

Katelyn Magnuson: 00:26:56

have some deductions they've taken.

Katelyn Magnuson: 00:26:58

You had mentioned when we were chatting offline that one of the

Katelyn Magnuson: 00:27:01

primary deductions that can be added back in and to count towards your

Katelyn Magnuson: 00:27:05

qualifying income is depreciation.

Katelyn Magnuson: 00:27:08

I know that for a lot of our clients and a lot of other small businesses,

Katelyn Magnuson: 00:27:12

depreciation is either non-existent or not a particularly high dollar value item.

Katelyn Magnuson: 00:27:17

So I know what you had mentioned was that so many business owners, and

Katelyn Magnuson: 00:27:22

I know I've been guilty of this in the past, but you asked someone, you

Katelyn Magnuson: 00:27:25

know, Hey, Kyle what's your income.

Katelyn Magnuson: 00:27:28

And you say what your business makes in a given month or a given year.

Katelyn Magnuson: 00:27:32

Okay, cool, Kyle, but like, what do you put in your pocket?

Katelyn Magnuson: 00:27:35

Like what gets moved from your business account to your personal account?

Katelyn Magnuson: 00:27:38

after expenses?

Katelyn Magnuson: 00:27:39

Because I think so many of us are like, oh yeah, I had a $300,000

Katelyn Magnuson: 00:27:42

a year or $150,000 a year, but maybe you took home half of that.

Katelyn Magnuson: 00:27:46

That's what you're actually going to be looking to use to qualify.

Kyle Seagraves: 00:27:50

realtors do this all day long.

Kyle Seagraves: 00:27:52

And I, you know, I imagine.

Kyle Seagraves: 00:27:53

This might be helpful, even just outside of the mortgage or home

Kyle Seagraves: 00:27:56

buying conversation for people, just from a mindset perspective.

Kyle Seagraves: 00:27:59

I know I got really discouraged when I first started in real estate because

Kyle Seagraves: 00:28:02

realtors and loan officers do this all the time is, you know, they're self-employed

Kyle Seagraves: 00:28:06

and they're, I, I made half a million dollars off CR whatever, a million

Kyle Seagraves: 00:28:09

dollars, but then you actually start talking with them and you're like, yeah,

Kyle Seagraves: 00:28:13

but you also spent $800,000 on your team and marketing and all the other costs.

Kyle Seagraves: 00:28:20

so you ultimately only made whatever, like, and even though it was still a

Kyle Seagraves: 00:28:26

good amount, you're going around telling people things that weren't actually true

Kyle Seagraves: 00:28:28

and you compare yourself to that you're comparing what, you know, comes into

Kyle Seagraves: 00:28:31

your bank account versus their gross

Katelyn Magnuson: 00:28:34

highlight real.

Katelyn Magnuson: 00:28:34

Yeah.

Katelyn Magnuson: 00:28:35

To someone's.

Katelyn Magnuson: 00:28:35

Yeah, exactly.

Kyle Seagraves: 00:28:36

right.

Kyle Seagraves: 00:28:37

And so it's important to remember when you are applying for a

Kyle Seagraves: 00:28:40

mortgage, you are applying for your mortgage, not your business.

Kyle Seagraves: 00:28:44

And so the underwriters looking at what is your.

Kyle Seagraves: 00:28:48

Personal income.

Kyle Seagraves: 00:28:50

another way to think about this is what is your business net income.

Kyle Seagraves: 00:28:52

If you're a hundred percent owner of that business, your personal income is going

Kyle Seagraves: 00:28:56

to be reflective of your business, net income, not your business, gross income.

Kyle Seagraves: 00:29:01

And so often what I see happens with a lot of self-employed

Kyle Seagraves: 00:29:04

people is they do write off stuff.

Kyle Seagraves: 00:29:05

So let's say.

Kyle Seagraves: 00:29:07

They make $150,000 gross in their business and they write

Kyle Seagraves: 00:29:10

off, uh, $50,000 in expenses.

Kyle Seagraves: 00:29:13

Now we joked about this on the previous episode of, you know, a write off doesn't

Kyle Seagraves: 00:29:17

mean that like, that didn't exist.

Kyle Seagraves: 00:29:19

You still paid $50,000 in expenses over your business.

Kyle Seagraves: 00:29:24

That was part of what it is required to run your business.

Kyle Seagraves: 00:29:27

So when you're looking at a mortgage, it wouldn't make sense for you

Kyle Seagraves: 00:29:30

personally to say, I'm gonna base how much I can afford on $150,000.

Kyle Seagraves: 00:29:35

That doesn't make sense, cuz you don't have $150,000 in income.

Kyle Seagraves: 00:29:38

You have a hundred thousand that you can actually use to pay for a home.

Kyle Seagraves: 00:29:42

So underwriters look at the same thing.

Kyle Seagraves: 00:29:44

And so this is where people kind of get tripped up.

Kyle Seagraves: 00:29:46

They're like, well, these are just writeoffs.

Kyle Seagraves: 00:29:48

And so I should be able to add those back, but those are real business expenses.

Kyle Seagraves: 00:29:52

You wouldn't be able to make the 150 without the 50.

Kyle Seagraves: 00:29:55

so it's important to remember that the underwriter understands the same thing.

Kyle Seagraves: 00:29:59

they're not gonna use your business gross income.

Kyle Seagraves: 00:30:03

They're gonna look at the net.

Kyle Seagraves: 00:30:04

Like, what did you actually make?

Kyle Seagraves: 00:30:06

And things can be added back like depreciation, but most people don't

Kyle Seagraves: 00:30:09

have, depreciation to add back that I've seen, if they do, they normally

Kyle Seagraves: 00:30:13

have a larger, they're more like, a C Corp structure and they get paid

Kyle Seagraves: 00:30:18

differently than a hundred percent owner.

Kyle Seagraves: 00:30:20

So, it is important to remember that of like your underwriter's going to

Kyle Seagraves: 00:30:23

look at what do you actually make.

Kyle Seagraves: 00:30:26

And if you are a hundred percent owner of your business, that is going to be

Kyle Seagraves: 00:30:30

the net income of your business, not what your gross business income is.

Katelyn Magnuson: 00:30:35

mean, I wish that would be wonderful.

Katelyn Magnuson: 00:30:38

Um, but also horrible at the same time.

Katelyn Magnuson: 00:30:40

Right.

Katelyn Magnuson: 00:30:40

Because you'd have people probably defaulting left and right on

Katelyn Magnuson: 00:30:42

loans because they don't actually have the cash flow to support it.

Katelyn Magnuson: 00:30:45

I know that when we're looking to take deductions for people and we're having

Katelyn Magnuson: 00:30:49

the conversation, you know, a new client comes on and we're having the chat of

Katelyn Magnuson: 00:30:52

like, what are your big life goals in the next, you know, two to five years,

Katelyn Magnuson: 00:30:54

are you looking to purchase a house?

Katelyn Magnuson: 00:30:56

You know, have children get married, anything that kind of

Katelyn Magnuson: 00:30:58

impacts their financial situation.

Katelyn Magnuson: 00:31:00

Because part of that is if they're like, yeah, you know, I really

Katelyn Magnuson: 00:31:03

wanna buy a house in the next year.

Katelyn Magnuson: 00:31:05

Okay, cool.

Katelyn Magnuson: 00:31:05

Let's look at what that actually looks like.

Katelyn Magnuson: 00:31:07

You know, if they know the area that they wanna be buying and if they know

Katelyn Magnuson: 00:31:09

kind of an idea of maybe home price or what they're looking for, we'll actually

Katelyn Magnuson: 00:31:14

look at that and be like, okay, great.

Katelyn Magnuson: 00:31:16

Either as a real rough estimate, we always encourage, you know, C loan officer to

Katelyn Magnuson: 00:31:20

like get your personal stuff sorted.

Katelyn Magnuson: 00:31:22

But from our side, your business should probably be making

Katelyn Magnuson: 00:31:25

this with this as a profit.

Katelyn Magnuson: 00:31:28

And that lets them plan accordingly.

Katelyn Magnuson: 00:31:30

If they do have a year or two to be ramping.

Katelyn Magnuson: 00:31:33

Okay, cool.

Katelyn Magnuson: 00:31:33

Maybe I paid $20,000 in like educational and professional, trainings that

Katelyn Magnuson: 00:31:38

I don't need to do this year or that I could drop for a few years

Katelyn Magnuson: 00:31:41

because they're not required.

Katelyn Magnuson: 00:31:43

And so I think that again, like with everything that we're looking at here,

Katelyn Magnuson: 00:31:46

a little bit of planning and foresight can go such a long ways in helping make

Katelyn Magnuson: 00:31:51

the qualifying process, especially as a self-employed individual so much.

Katelyn Magnuson: 00:31:55

Morelin.

Kyle Seagraves: 00:31:56

Yeah.

Kyle Seagraves: 00:31:57

And that brings up a good point.

Kyle Seagraves: 00:31:58

I think for a lot issues with the deductions can come from the like,

Kyle Seagraves: 00:32:02

well, if I knew this was gonna be an issue, I wouldn't have bought the

Kyle Seagraves: 00:32:05

video equipment or I wouldn't have.

Kyle Seagraves: 00:32:07

The course that I didn't really need, but I wanted, and I could afford, like,

Kyle Seagraves: 00:32:10

I wouldn't have done those things.

Kyle Seagraves: 00:32:11

If I knew I could buy a house.

Kyle Seagraves: 00:32:12

And if you find yourself in that situation, there are programs that

Kyle Seagraves: 00:32:15

will not look at your business.

Kyle Seagraves: 00:32:18

Net income.

Kyle Seagraves: 00:32:19

so there are programs called bank statement programs, and they'll

Kyle Seagraves: 00:32:22

actually average, uh, either personal or business bank statements.

Kyle Seagraves: 00:32:26

And they'll look at either a 12 month average or a 24 month

Kyle Seagraves: 00:32:29

average, to use as your income.

Kyle Seagraves: 00:32:31

So they'll take all the deposits, divide those by 12

Kyle Seagraves: 00:32:34

or 24, um, to find your income.

Kyle Seagraves: 00:32:36

And then they multiply at times a artificial expense ratio.

Kyle Seagraves: 00:32:40

So this might be 50% for someone like.

Kyle Seagraves: 00:32:43

Has low cost like realtor, it might be 90% meaning you can use 90% of those gross

Kyle Seagraves: 00:32:48

deposits as your income, those ignore all of your deductions that you'd put in.

Kyle Seagraves: 00:32:53

So those can be helpful.

Kyle Seagraves: 00:32:55

Route.

Kyle Seagraves: 00:32:56

However, interest rate is a lot higher and the down payment is a lot higher.

Kyle Seagraves: 00:33:00

You're gonna be expecting to be due probably around 20 to 25%

Kyle Seagraves: 00:33:03

down payment and interest rate is usually gonna be one to 2% higher.

Kyle Seagraves: 00:33:08

Sometimes more depending on your credit score than a traditional.

Kyle Seagraves: 00:33:13

So, what I've worked with clients on sometimes is getting them in

Kyle Seagraves: 00:33:16

a bank statement program because that's the only thing they

Kyle Seagraves: 00:33:19

could use to qualify for a loan.

Kyle Seagraves: 00:33:21

and then over the next two to three years, they can readjust their

Kyle Seagraves: 00:33:26

tax strategy to then be able to qualify for a conventional loan.

Kyle Seagraves: 00:33:29

So they miss out on some tax savings, but they have better savings on

Kyle Seagraves: 00:33:32

their interest because they can refinance into a lower interest rate.

Katelyn Magnuson: 00:33:37

Absolutely.

Katelyn Magnuson: 00:33:37

No, which makes total sense.

Katelyn Magnuson: 00:33:38

I think there's, there's so much strategy behind the timing and, you

Katelyn Magnuson: 00:33:43

know, do you have two years or three years where you can do this and have

Katelyn Magnuson: 00:33:45

it reflected on your tax returns?

Katelyn Magnuson: 00:33:47

Is the home purchase an immediate need that you need to do?

Katelyn Magnuson: 00:33:49

Cool.

Katelyn Magnuson: 00:33:50

Maybe we do look at bank statement.

Katelyn Magnuson: 00:33:51

Maybe we do, you know, it comes with.

Katelyn Magnuson: 00:33:54

I'm gonna save temporary downfalls potentially.

Katelyn Magnuson: 00:33:57

Right.

Katelyn Magnuson: 00:33:57

But also allowing you to do whatever that next step is for yourself.

Katelyn Magnuson: 00:34:01

But I think that so much of it is taking a step back for a second because

Katelyn Magnuson: 00:34:06

everyone's, you know, oh, I wanna pay as little in taxes as possible.

Katelyn Magnuson: 00:34:09

I wanna, I actually had someone say one time.

Katelyn Magnuson: 00:34:11

Well, my mom said that my taxable income should be zero because I

Katelyn Magnuson: 00:34:14

own a business at the end of the.

Kyle Seagraves: 00:34:16

Hmm.

Katelyn Magnuson: 00:34:17

I was like, well, not just artificially zero and also

Katelyn Magnuson: 00:34:23

that's not gonna help, like cool.

Katelyn Magnuson: 00:34:25

It'll help you a lot with taxes.

Katelyn Magnuson: 00:34:26

It's not gonna help you when it comes time to qualify for anything.

Katelyn Magnuson: 00:34:30

Uh, you know, we're not just spending all of our money to try

Katelyn Magnuson: 00:34:33

and hit $0 and income because qualifying for things like a car or.

Katelyn Magnuson: 00:34:39

A home loan or anything else that you might need or credit card

Katelyn Magnuson: 00:34:42

gets a little bit difficult if you don't have any, you know, taxable

Katelyn Magnuson: 00:34:45

income at the end of the year.

Katelyn Magnuson: 00:34:46

especially if it's not authentic and you're just buying things

Katelyn Magnuson: 00:34:49

to overinflate your expenses that are not actually needed.

Katelyn Magnuson: 00:34:52

So I think that having a strategy between, of course, you don't

Katelyn Magnuson: 00:34:55

wanna not have any write offs if they're actually necessary for the

Katelyn Magnuson: 00:34:59

business, but having the discussion of where's that sweet spot between.

Katelyn Magnuson: 00:35:04

Business expenses.

Katelyn Magnuson: 00:35:05

Writeoffs qualifying for whatever my goals are and kind of

Katelyn Magnuson: 00:35:08

sticking within those lanes when

Kyle Seagraves: 00:35:10

Yeah, absolutely.

Kyle Seagraves: 00:35:12

Yeah.

Kyle Seagraves: 00:35:12

And not going overboard on just one strategy, just cuz you know, and usually

Kyle Seagraves: 00:35:16

the, the tax savings, I feel like for a lot of people, they overestimate how

Kyle Seagraves: 00:35:20

much they can save in taxes by having a write off, where, saving a significant

Kyle Seagraves: 00:35:25

amount of money in taxes requires a significant strategy, not just.

Kyle Seagraves: 00:35:31

I put Starbucks on my business card.

Kyle Seagraves: 00:35:33

It is a little more complex than that to find the savings that you want to

Kyle Seagraves: 00:35:37

which is where like speaking with, with you and your team is a much better

Kyle Seagraves: 00:35:41

approach than just let me just write off everything and then not actually

Kyle Seagraves: 00:35:44

consider what is the whole picture of where I want to go, making sure that

Kyle Seagraves: 00:35:48

everything I'm doing now aligns with that.

Katelyn Magnuson: 00:35:51

Well, and I think that some of the things that people

Katelyn Magnuson: 00:35:53

I'm gonna say kind of sleep on are retirement contributions, especially

Katelyn Magnuson: 00:35:57

as self-employed individuals.

Katelyn Magnuson: 00:35:59

you know, when it comes to tax strategies because, and great me if

Katelyn Magnuson: 00:36:03

I'm wrong here, but whe like if you're doing a, you know, an individual

Katelyn Magnuson: 00:36:06

401k that gets added back in.

Katelyn Magnuson: 00:36:10

To your gross income when you're looking to qualify.

Katelyn Magnuson: 00:36:12

I believe.

Katelyn Magnuson: 00:36:13

Cause I know if I remember correctly, it does with W2 income and that could be

Katelyn Magnuson: 00:36:16

a way that you're avoiding income taxes completely legally, but you're also not,

Katelyn Magnuson: 00:36:21

you know, buying, you're not buying a bunch of cameras or video equipment that

Katelyn Magnuson: 00:36:24

you didn't actually need or upgrading it, but you're still having, you know,

Katelyn Magnuson: 00:36:27

a tax savings that goes along with it.

Katelyn Magnuson: 00:36:29

Right,

Kyle Seagraves: 00:36:29

Yeah.

Kyle Seagraves: 00:36:30

have to double check on the business contributions to retirement, but I do

Kyle Seagraves: 00:36:35

know on the personal side, you can.

Katelyn Magnuson: 00:36:36

right, right.

Katelyn Magnuson: 00:36:37

Yeah.

Katelyn Magnuson: 00:36:37

So yeah, if you're maxing out, like, let's say you have an, I 401k,

Katelyn Magnuson: 00:36:40

I think it's $20,500 this year.

Katelyn Magnuson: 00:36:42

Um, if you're able to max that out on the personal side, the.

Katelyn Magnuson: 00:36:45

I don't think would be added back in.

Katelyn Magnuson: 00:36:46

I would be interested.

Katelyn Magnuson: 00:36:47

Maybe we'll add that in the notes to this.

Katelyn Magnuson: 00:36:49

Cause I'd be interested to know what that looks like on your end.

Katelyn Magnuson: 00:36:51

I would expect it to not count towards your income because

Katelyn Magnuson: 00:36:54

it is a true business expense.

Katelyn Magnuson: 00:36:56

The other thing for.

Katelyn Magnuson: 00:36:58

Tax reduction strategies, and it doesn't necessarily make a difference, like

Katelyn Magnuson: 00:37:01

you said, for qualifying, but if you are a single member, LLC, and you've

Katelyn Magnuson: 00:37:06

elected to be taxed as an S Corp, which I know a ton of our clients have been

Katelyn Magnuson: 00:37:09

because there's a pretty substantial tax savings that comes with that.

Katelyn Magnuson: 00:37:12

Being taxed as an S Corp is not helping you to qualify for, you know, in the

Katelyn Magnuson: 00:37:16

home loan or the home mortgage process.

Katelyn Magnuson: 00:37:18

However it can be reducing.

Katelyn Magnuson: 00:37:20

Your income taxes dramatically, which can provide savings that you're looking

Katelyn Magnuson: 00:37:25

for to fund that down payment, to fund that emergency fund and to have

Katelyn Magnuson: 00:37:29

available cash on hand to, you know, actually live a life that you enjoy.

Katelyn Magnuson: 00:37:34

So it's still the same income that passes through, but you're paying

Katelyn Magnuson: 00:37:37

potentially less taxes on that.

Kyle Seagraves: 00:37:39

Yeah, I think that's a much better strategy to begin with than

Kyle Seagraves: 00:37:42

just let me go right off every single expense possible and actually spend

Kyle Seagraves: 00:37:46

money on that to try to save, uh, get

Katelyn Magnuson: 00:37:49

Right.

Katelyn Magnuson: 00:37:51

Right.

Katelyn Magnuson: 00:37:51

It's like, uh, what is it jumping over dollars to pinch pennies or something, but

Katelyn Magnuson: 00:37:55

Yeah.

Katelyn Magnuson: 00:37:55

just not necessarily like the, the most sound financial strategy.

Katelyn Magnuson: 00:37:58

I know we see it happen a lot because there is there's that misconception that

Katelyn Magnuson: 00:38:01

like, oh, I spent a hundred dollars.

Katelyn Magnuson: 00:38:03

I saved a hundred dollars on taxes.

Katelyn Magnuson: 00:38:05

Like, no, you spent a hundred dollars.

Katelyn Magnuson: 00:38:07

You probably saved between $12 and $22 on taxes.

Katelyn Magnuson: 00:38:10

So you're still out 80 ish.

Katelyn Magnuson: 00:38:12

Um, Was there anything else that you wanted to share when it comes to being

Katelyn Magnuson: 00:38:19

self-employed and you know, the strategy around buying a house and maintaining

Katelyn Magnuson: 00:38:23

that W2, if you can, and kind of everything that factors into that.

Katelyn Magnuson: 00:38:27

I mean, I feel like we, we covered a lot in this, but is there

Katelyn Magnuson: 00:38:29

anything that we're missing?

Kyle Seagraves: 00:38:30

Yeah.

Kyle Seagraves: 00:38:30

I feel like for most people, like it can feel very complicated

Kyle Seagraves: 00:38:33

and there are moments in which there is a complexity to it.

Kyle Seagraves: 00:38:36

However, for most people, um, it's kinda the same thing with student loans

Kyle Seagraves: 00:38:41

where people feel really overwhelmed.

Kyle Seagraves: 00:38:42

I don't know if I can buy a house student loans and then we'll take a look and

Kyle Seagraves: 00:38:47

they get approved and they're like, wait, That's with my student loans.

Kyle Seagraves: 00:38:49

Like, yeah.

Kyle Seagraves: 00:38:50

They're not a problem.

Kyle Seagraves: 00:38:51

It's kinda the same thing with self-employed is like a lot of

Kyle Seagraves: 00:38:54

people are like, man, I don't know.

Kyle Seagraves: 00:38:55

And it's just confusing and it's a lot of moving pieces and then they get

Kyle Seagraves: 00:38:59

approved and it's not a problem at all.

Kyle Seagraves: 00:39:02

Sometimes in our minds we can overcomplicate things and there are

Kyle Seagraves: 00:39:04

instances in which there's complexity in.

Kyle Seagraves: 00:39:06

It requires some more paperwork and some more creative figuring out solutions.

Kyle Seagraves: 00:39:10

But for the majority of people, if you've been in business, when you've had

Kyle Seagraves: 00:39:13

consistent income for a few years, Odds are you're gonna be able to get approved

Kyle Seagraves: 00:39:17

and it's gonna be fine, and it's not going to be an issue that you run into.

Kyle Seagraves: 00:39:21

and so don't be afraid to talk with the loan officers, start that

Kyle Seagraves: 00:39:24

process and get things moving, and then figure out what's the game plan

Kyle Seagraves: 00:39:28

that needs to happen afterwards.

Kyle Seagraves: 00:39:29

instead of trying to figure it all out, have all the anxiety without even

Kyle Seagraves: 00:39:33

knowing if it's a problem to begin with.

Katelyn Magnuson: 00:39:37

Absolutely.

Katelyn Magnuson: 00:39:37

I could not agree more.

Katelyn Magnuson: 00:39:40

Take some time plan, get your information.

Katelyn Magnuson: 00:39:43

then make a plan for how to move forward instead of getting so in our heads.

Katelyn Magnuson: 00:39:47

And I think so many of us make the mistake of building things up when

Katelyn Magnuson: 00:39:52

really we could just take like 20, 30 minutes to move forward and have

Katelyn Magnuson: 00:39:56

significantly less anxiety around it.

Katelyn Magnuson: 00:39:59

Well, Kyle, that was jam packed.

Katelyn Magnuson: 00:40:03

Next week, we're going to have our final episode in this mini series.

Katelyn Magnuson: 00:40:07

And we are going to be talking about the housing market at large,

Katelyn Magnuson: 00:40:11

which actually is one of the topics.

Katelyn Magnuson: 00:40:14

I think that I'm most excited to chat about with you because

Katelyn Magnuson: 00:40:17

it is changing a lot right now.

Katelyn Magnuson: 00:40:19

And the timing of this season, I think could not have been

Katelyn Magnuson: 00:40:21

better for us to be recording.

Katelyn Magnuson: 00:40:23

So we will see you all next week and chat them.