Tips On How Self-employed People Can Secure A Mortgage Loan
Following the sub-prime mortgage crisis of 2008, lenders have tightened the qualification criteria across the board. People who are self-employed are finding it increasingly difficult to secure a mortgage. According to a report published by Small Business Administration, the number of self-employed people totaled 9.9 million as of the second quarter of 2012. Some of the issues cited are uneven income from self-employment, the onetime start-up expense that was considered ongoing two years back is no longer categorized so, higher documentation burden and the need to qualify for both old and new houses. For the self-employed class, the stated income loan was considered as a boon.
In the era prior to the housing crisis, the lender never verified the income of the borrower through W-2s and tax returns in the case of a stated income loan. Currently, most mortgage lenders ask for the self-employed person’s Schedule C (income/loss statement) for a minimum of two years. If the income for the second year is higher, the lender takes the average. If the income for the second year is lower, then the lender will consider only the lower income. Those operating multiple companies will have to provide tax returns for two years for each of the companies in which they have 25 per percent ownership. Further, the source of funds for the down payment has to be documented.
The real issue, however, is that mortgage eligibility depends on net income. This means that the business deductions that the self-employed write off can work against them, according to Patrick Ruffner, VP at Guaranteed Rate, the Chicago-based independent mortgage company. However, depreciation can be added back to the net income of the borrower. If you are a self-employed person, here are some ways in which you can not only ease the process, but also boost your chances of getting a loan.
#1: You must have a history. Your business must have been operating for a minimum of two years. You should also be able to demonstrate the stability of your business. If the business is in the same line as that of your experience, some banks may make some concessions. However, you need to have a good credit score and also meet all requirements for a loan.
#2: You should know the paperwork involved and keep it ready. Stated-income loans are no longer available and it is, therefore, important to document all the money that you make. The requirements of the banks are different. Find out the requirements of the bank where you are going to apply for a mortgage.
#3: Contacting the lender over the phone or online may be convenient, but it is better to meet them in person. This is because the loan officer who specializes on mortgages for the self-employed will be able to present a different package if you fail to qualify for one.
#4: You can consider bringing down the deductions to show higher taxable income. Deductions are seen as an advantage of self-employment, but it can adversely affect your income and make you ineligible for a mortgage loan in the present scenario.
#5: It can be of great help if you can keep an amount that can take care of the mortgage payments for a year or so. This is because income levels can fluctuate in self-employment. Banks would like to make sure that you will be able to meet mortgage commitments during lean times.
#6: Another thing that you can consider is having a co-signer whose finances are in good condition.
Brenda Panin is an Australian blogger interested in personal finance. Information for this article has been provided by Freedom Loans.