Hi guys, I have read that traders should start a company in order to trade from (i.e. instead of as an individual trader, trade stocks using a company name) - then pay yourself from that. This is how people who are traders can get a mortgage. The question is: Is it a Sole Trader or a Limited company that is better option for the above approach. Or is it a some other Thank you
That is one way to do it, but I have read that those who name themselves as traders / investors and provide tax statements - the banks are skeptical about giving them mortgage. Hence the establishment of Company may be required ? - hence the question.
That is correct. Lenders want to see earned income, not trading income. Thus, you would need to form an entity and pay yourself a salary for 2 years. Or, hook up with a firm that will pay you a salary.
What type of entity should it be ? Sole Trader or a Ltd company ? Also, what do you mean by "hook up with a firm that will pay you a salary." ?
Find a bank that will keep your mortgage in-house. Then they don’t have any rules. Community banks are good for this. If you own your own business, the bank will require to understand what that business is and still want three years of taxable income statements in order to fund a conforming mortgage.
If you are solidly profitable to the extent that you feel comfortable paying a mortgage from your earnings, then invest the time and/or money to confer with a CPA and a mortgage lender. I have never met a conventional lender that will approve a loan based only on trading income, which they consider investment income. A good accountant or CPA can advise you on what type of entity which would be easiest to form and administer. (Likely an LLC, if you are in the U.S.) From that, you will pay yourself a salary which will then be considered "earned income", and you will then file business/personal tax returns for 2 years, which you can then present to a lender. Lenders, don't care how much you earn as a retail trader, because they all consider it 'investment income', no different than if you were a long term investor in IBM. And they know that investment income is not reliable, and can come and go. So they will not lend on it. Generally, they aren't stupid. (Yes, you can always find hard-money private lenders if you are really raking in the profits and need a loan, but you will pay a lot for their involvement.) So for a conventional mortgage, you are forced to 'professionalize' your operation, make yourself an employee, and file 2 years of returns. Now, this in itself comes with some downsides related to employment taxes, fees, etc., which you need to cover with a CPA. If this all sounds complex and bothersome, well, it is. Probably easier for you to rent, book your profits, then pay cash for a house.
Should it be 2 years at a single organization or can it be that across more than one organization for the mortgage ?
If you've changed jobs and changed professions, or lowered your salary, that may be an issue. Lenders want to see consistency in income, and profession. Call a lender. Ask your questions. They don't bite.