I have a friend who is a mortgage broker. She had a client who is a very successful character actor, and had many W-2’s and some 1099’s. She submitted his loan to a lender whose underwriting center is in the mid-west, and they are not familiar with how the Entertainment industry works. They declined the loan stating, “This guy must be a loser, because he can’t hold a job”…..we laughed and she sent the loan to a smarter lender who approved the loan.
How could they could make such an obviously stupid error? He earned a lot of income!
Here is the reason. For nearly everyone outside the Entertainment industry, W-2 income means you have one steady job, typically a salary or hourly. Underwriters outside of Los Angeles and New York are accustomed to seeing one or two W-2’s and doing simple math. They do not understand that the Entertainment industry usually pays contract work with a W-2; occasionally they are 1099’d.
When the underwriter saw multiple W-2’s in one year, she assumed he could not hold down a job, so his income is inconsistent and cannot be relied upon.
People in the Entertainment industry who work for many production companies throughout the year are considered self-employed by lenders who know how the industry works. Before you apply for a home loan with a bank, I recommend you determine whether they understand that you are self-employed even though you have W-2 income.
If you have risen to the level where you have a business manager and/or a private banking relationship with a bank who caters to the Entertainment industry, then you will be fine. This article is designed to help people before they get to that level.
When lenders calculate self-employed income, they do a 2-year average of your income if the most recent year is the same or higher than the previous year. If the income in the most recent year is lower, then they do a monthly average of only that year.
For people in the Entertainment industry, all W-2 and 1099 income reported on Schedule C is added together as self-employed income. On Schedule C, they take the income on line 31, add back “business use of home” if that is reported on line 30, add back Depreciation on line 13, add back mileage, and deduct Meals expenses from line 24b (I address the Meals expense issue in another article).
This is a simplified version of their income calculation, but it applies to most people. The precise calculation is on the Calculators tab of my website.
Smart accountants and business managers usually form a “Loan-out Corp.” for their Entertainment clients. If you have an S-Corp., then all lenders will understand that you are self-employed.
If you are uncertain whether your bank or mortgage broker understands that you should be treated as self-employed, then I recommend you ask your accountant to write a letter explaining that fact in detail.
I received a letter from a CPA who did not know me and was clearly accustomed to dealing with lenders who don’t understand Entertainment income, because her self-employment letter was so well worded, I saved it as a template to help other people.
I am a mortgage broker and banker. We underwrite most loans in-house. So, I haven’t had this issue at my current company. But I did have issues with my previous company, because all underwriting was done by the lender.
If you want a copy of the template to help your accountant explain your income to a lender, email me at CustomerCare@HollyGustlin.com or call me at 877-728-2008.