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Question on Employment Status for Obtaining a Mortgage

The last post in this topic was posted 3964 days ago. 

 

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Question: My fiance and I work for large organizations. He's been at his job for 11+ years and I've been at mine for 2 years (13 at the prior job). In addition to his dayjob, my fiance started a business on the side with a partner about three years ago. The goal was to build it up enough to leave the day job and be self-employed full time.

 

We have been trying to find a house for two years, but have had little success. I have been adamant that we must find a house before he leaves his day employment in order to secure the loan. Now, suddenly, the business is doing so well that it seems if he doesn't leave very soon and devote himself to it full-time, he will lose it as he will have to turn so much business away. This is all great and we intend to keep our mortgage very low and have reserves, etc., and I have a decent job so we have no concerns that even if this business doesn't work out, that we will be stuck with a mortgage we cannot afford; we have contingencies in place for all of this.

 

My question is: For reasons too long to get into, he is not listed anywhere as an officer/owner of the corporation. Right now, it is a handshake deal. Of course, he would never leave his dayjob without having strong, attorney-reviewed contracts in place to secure his ownership interest and role in the company. However, we were thinking that perhaps he could work there as an "employee" until we purchased our house. In other words, this is a legitimate business (not out of a home--but a real business operating at a location we lease manufacturing and selling products to customers) with someone unrelated as a legitimate owner. If he were to be paid as an employee paying all the taxes, etc. and listed as an employee with a W-2, etc., would this suffice to a mortgage company in order to get a mortgage? (Obviously, we'd have to work out an agreement with the business partner who's listed as the current owner--forget about matters of trust and the financial ramifications of not being able to make deductions, etc.--that's our problem.)

 

Also, he has never been paid a DIME (not even a dollar under the table) for his work here. His partner put up the money and he has put in all sweat equity. So there is no tax-related or other "trail" of money that has been paid to him from this company to indicate that he is an owner.

 

I realize he'd have to deal with the issue of just changing jobs, but I'm not so concerned about that. He has a long history at his prior jobs (11 years and 6 years), he's staying in the same industry and his pay would be the same or more.

 

Assuming he has three months of real paychecks behind him, would this be viewed as simply changing jobs and, as a result, would that be the only thing we'd have to deal with? Do mortgage companies ever investigate companies that are employers of the borrowers to determine how long they've been in business, what their revenues and reserves are, how many employees they have, how viable they are, etc.? I just want to be sure if he makes the jump we have a plan in place to get our house.

 

Any insight would be greatly appreciated.

 

Thanks.

Edited by GypsyGirl

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Question: My fiance and I work for large organizations. He's been at his job for 11+ years and I've been at mine for 2 years (13 at the prior job). In addition to his dayjob, my fiance started a business on the side with a partner about three years ago. The goal was to build it up enough to leave the day job and be self-employed full time.

 

We have been trying to find a house for two years, but have had little success. I have been adamant that we must find a house before he leaves his day employment in order to secure the loan. Now, suddenly, the business is doing so well that it seems if he doesn't leave very soon and devote himself to it full-time, he will lose it as he will have to turn so much business away. This is all great and we intend to keep our mortgage very low and have reserves, etc., and I have a decent job so we have no concerns that even if this business doesn't work out, that we will be stuck with a mortgage we cannot afford; we have contingencies in place for all of this.

 

My question is: For reasons too long to get into, he is not listed anywhere as an officer/owner of the corporation. Right now, it is a handshake deal. Of course, he would never leave his dayjob without having strong, attorney-reviewed contracts in place to secure his ownership interest and role in the company. However, we were thinking that perhaps he could work there as an "employee" until we purchased our house. In other words, this is a legitimate business (not out of a home--but a real business operating at a location we lease manufacturing and selling products to customers) with someone unrelated as a legitimate owner. If he were to be paid as an employee paying all the taxes, etc. and listed as an employee with a W-2, etc., would this suffice to a mortgage company in order to get a mortgage? (Obviously, we'd have to work out an agreement with the business partner who's listed as the current owner--forget about matters of trust and the financial ramifications of not being able to make deductions, etc.--that's our problem.)

 

Also, he has never been paid a DIME (not even a dollar under the table) for his work here. His partner put up the money and he has put in all sweat equity. So there is no tax-related or other "trail" of money that has been paid to him from this company to indicate that he is an owner.

 

I realize he'd have to deal with the issue of just changing jobs, but I'm not so concerned about that. He has a long history at his prior jobs (11 years and 6 years), he's staying in the same industry and his pay would be the same or more.

 

Assuming he has three months of real paychecks behind him, would this be viewed as simply changing jobs and, as a result, would that be the only thing we'd have to deal with? Do mortgage companies ever investigate companies that are employers of the borrowers to determine how long they've been in business, what their revenues and reserves are, how many employees they have, how viable they are, etc.? I just want to be sure if he makes the jump we have a plan in place to get our house.

 

Any insight would be greatly appreciated.

 

Thanks.

 

If the company is doing business, manufacturing and selling, it probably has a D&B file. A mortgage underwriter would normally check a D&B just to make sure that an employer is established. A new employee of a company with no D&B or one indicating it is new and small would likely be a problem.

 

The second issue is his ownership position. It is extremely unwise to have been working on a "handshake" providing "sweat equity" without formalizing the relationship. It can create lots of problems even if everyone agrees what is intended at this time. At a minimum you should have a written agreement tied to an LLC. Personally, I started a company with another fellow and at the get go we got a Nolo press DIY book and ran through the ins and outs of a corporate structure. Agreed on structure, issued stock, and formed the thing on our own. You do not need to hire lawyers, it's a fairly easy process. We ran like that for over 5 years before we had to get lawyers largely because we started off on the right foot. Incorporating provides a lot of built in methods for solving issues of equity and ownership and even conflicts (and they do arise) and makes it fairly easy to acquire new investors. At least on a small scale.

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you said he has not been paid a dime for his 3 years work at the new co?

 

I would not leave a real job for a handshake of part ownership. I have seen the outcome before and it did not end well.

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For reasons too long to get into, he is not listed anywhere as an officer/owner of the corporation. Right now, it is a handshake deal.

 

Your instinct to get the mortgage/home before switching jobs is dead on. However, know this: If he is not listed anywhere as an officer/owner of the corporation then he is not one.

 

Corporate structures and issues of stock ownership, boards, and officers are based entirely on written records, some of which are filed with the state and taxing authorities. Ownership by "handshake" in a corporation is roughly as meaningful as owning a home through a "handshake." You can't register a handshake with the county recorder.

 

Your fiance needs to get this dealt with pronto. He may not be able to. Whatever the reasons it ain't good. If the reason is that this startup is in a competitive industry with your fiance then you should expect his partner to behave as "ethically" to him as he is to his current employer.

 

Oh, and consider yourself very lucky your credit wasn't good enough to get that house back in '07.

Edited by cashnocredit

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Thank you all so much for your responses. Believe me, you don't have to lecture me on the multitude of problems with this situation (non-credit speaking). I have been against this from the start and no one heeded my advice. At this point, we are where we are, and my fiance will not leave his current employment without solid, signed business contracts in place, a buffer of capital in the account and a steady stream of revenue in place. The only issue is the timing for when he changes the corporate entity documents with the state to reflect that he is a principal in the business.

 

The mention of D&B was extremely helpful...and ironic. Thanks, Cashnocredit. I have been pushing to obtain business credit for quite some time. My fiance thinks I'm putting the cart before the horse but we CBers know the value of building good credit even before you need it. I wanted to start a year ago so that when we needed it, we'd have it...takes a year or two of good tradelines to get to a good place with biz credit just as with personal credit.

 

The D&B lookup makes perfect sense. How else could a mortgage company/bank ensure that the employment is "legit" and minimize the risk of someone losing his/her income because they work for a sketchy company?

 

In any event, I am in the process of getting a DUNS number and having our three years of leased equipment (three separate leases for three items of equipment with the same company at a total of $6,500/month--ALWAYS paid on time) added manually to our account after that, which both D&B and the creditor said they said they can do, and quickly adding other accounts to build biz credit and get a Paydex score. If this works, do you think three years of info (legitimate--just inserted retroactively), recent additional accounts and a good Paydex score (I'm thinking 3-6 months down the line) will suffice in order for the company not to raise any red flags as a legitimate employer? I'm trying to negate the need for further inquiry so that this mortgage would simply be processed under two working, non-self employed individuals, one of whom just changed jobs.

 

I'm also intending to work with either my credit union or a local community bank on this, so hopefully the personal element that may be increased with these mortgagors may help in this instance.

 

Thanks so much again for all of your help, and if anyone has any comments about my D&B plan combined with the use of a credit union/small bank (how effective you think this may be), or anything else, I'd appreciate it. I'm trying like heck to find the house first, but it just may not happen...

 

Thanks again! CBers rule!!!

 

P.S. We did have the credit (thanks to CB) to buy a house in '07...we just knew better not to (oh yeah, and there was that little issue of the down payment...) :D

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Dont pay for the CReditbuilder from DNB.. worthless... If your leasing equipment already at 6500 a month pretty sure you already have a Duns number. Do a search under your biz name, regardless if its inc'd or LLC'd.

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Thank you all so much for your responses. Believe me, you don't have to lecture me on the multitude of problems with this situation (non-credit speaking). I have been against this from the start and no one heeded my advice. At this point, we are where we are, and my fiance will not leave his current employment without solid, signed business contracts in place, a buffer of capital in the account and a steady stream of revenue in place. The only issue is the timing for when he changes the corporate entity documents with the state to reflect that he is a principal in the business.

 

The mention of D&B was extremely helpful...and ironic. Thanks, Cashnocredit. I have been pushing to obtain business credit for quite some time. My fiance thinks I'm putting the cart before the horse but we CBers know the value of building good credit even before you need it. I wanted to start a year ago so that when we needed it, we'd have it...takes a year or two of good tradelines to get to a good place with biz credit just as with personal credit.

 

The D&B lookup makes perfect sense. How else could a mortgage company/bank ensure that the employment is "legit" and minimize the risk of someone losing his/her income because they work for a sketchy company?

 

In any event, I am in the process of getting a DUNS number and having our three years of leased equipment (three separate leases for three items of equipment with the same company at a total of $6,500/month--ALWAYS paid on time) added manually to our account after that, which both D&B and the creditor said they said they can do, and quickly adding other accounts to build biz credit and get a Paydex score. If this works, do you think three years of info (legitimate--just inserted retroactively), recent additional accounts and a good Paydex score (I'm thinking 3-6 months down the line) will suffice in order for the company not to raise any red flags as a legitimate employer? I'm trying to negate the need for further inquiry so that this mortgage would simply be processed under two working, non-self employed individuals, one of whom just changed jobs.

 

I'm also intending to work with either my credit union or a local community bank on this, so hopefully the personal element that may be increased with these mortgagors may help in this instance.

 

Thanks so much again for all of your help, and if anyone has any comments about my D&B plan combined with the use of a credit union/small bank (how effective you think this may be), or anything else, I'd appreciate it. I'm trying like heck to find the house first, but it just may not happen...

 

Thanks again! CBers rule!!!

 

P.S. We did have the credit (thanks to CB) to buy a house in '07...we just knew better not to (oh yeah, and there was that little issue of the down payment...) ;)

 

 

1. I think this is an excellent time to buy a home. The prices are now reasonable though it may be a while before we see them appreciate.

2. Having two incomes is considered a lot better than one but not if you are running high cc utilization.

3. As far as business credit goes, what they (mortgage underwriters) would be looking for is how long the company has been around and paying its bills. D&Bs are mostly used for trade lines of credit, ie: the usual 30 days recievables and capital equip leasing. It will get less scrutiny since you have stable employment.

 

As far as the side biz goes, please buy something like the Nolo DIY incorporation book just to inform yourselves of the issues. If, after that, your fiance still wants to be off the record, he and you will be knowing the risks.

 

You're exhibiting good thinking about much of this. I don't know your fiance's precise situation but others I've known in these sorts of assymetric situations have not faired well. It's easier to provide the money than the work so I hope it works out for you guys.

Edited by cashnocredit

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Thanks for the tip on the book. I am actually a paralegal at a Fortune 10 company and I work in the Legal Dept. reviewing contracts...embarrassed to admit that given the situation my fiance is in but, again, that was his choice against my fierce protests, so there's nothing I can do. But I do know how to protect myself with contracts as I draft and negotiate them (including these types of contracts) all the time...I just couldn't get the players all to the table to do it and my fiance jumped the gun.

 

Bottom line is that we will have solid contracts in place before he leaves and, worst case scenario, even if the business fails, we won't lose any money (just time and labor) and he'll go back to his old job, so all I am concerned about is the house.

 

My only concern is, if he leaves his day job, whether I can effectively create the appearance of him being an employee at an "acceptable" company in lieu of an owner. The question is whether the mortgage company will be investigating the viability of the company and, if so, how and what is the criteria for acceptability? (Actually, the company is very viable, but the mortgage cmpany may not know that based on the fact that there is no DUNS number, etc.) I'm hoping that in the next three months I can get his company to a good place in that regard and, coupled with the fact that we may seek financing from a credit union or local bank, who tend to be more lenient and understanding about certain things, that will enable us to obtain a conventional mortgage.

 

Here's hoping!

 

Thanks again for all of your assistance everyone...it helps tremendously as it gives me good ammo to keep this biz credit thing steamrolling forward. :grin:

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