March 2, 2011 | by Gregg Busch
Difficulties for the self-employed borrower

As all of us are aware by now, after the largest housing bust since the great depression, getting a mortgage is far from the pre-bubble days where just filling out an application gave you an over 70 percent chance of getting a loan, if you had good credit.

No worries, blood and urine samples are not on the table to add to the scrutiny. Everything else that you can think of involving your financial picture does, however, need to be disclosed and reviewed by a lender. For those of you that are self-employed or own your own business, getting a loan can be even more toilsome.

Pre-housing bubble days allowed the “self-employed” to just state their income and put a decent amount down in cash. We, the lenders, just focused on the borrowers’ credit scores, the value of the property, and in most cases, savings in the bank. As the housing market nationally started to crash, so did more of these stated income loans, which are referred to these days as “liar loans.” Not all self-employed borrowers that used stated income loans were lying about their income, but since the program was abused, the program went “pop” with the bubble.

Self-employed borrowers now have to submit two years of signed tax returns, which must be re-verified from the IRS by the lender to make sure they are the actual tax returns submitted and not falsified copies. We, as lenders, do not look at your gross income to qualify for a mortgage, but your net income after adding back things like depreciation which are not actual cash losses. If you write-off a lot of deductions on your IRS 1040, then you might have a tougher time qualifying for a home loan. Now you see why stated income was so advantageous for the self-employed if used properly.

Here is what you need to know about getting approved as a self-employed borrower:

1. You must have a two-year history of being self-employed with reported 1040s to qualify for a mortgage. There are some exceptions so e-mail me if you have any questions at gbusch@fsavings.com.

2. Lenders are looking for several months of “cash reserves,” which are total mortgage payments in liquid assets. Many mortgage programs, especially if the loans are over the Fannie Mae/Freddie Mac loan limits, are looking for as little as six months or up to 12 months of cash reserves, depending on the loan size and down payment.

3. Lenders are now using income reported to the IRS as taxable income to qualify for a loan. If you are writing-off a lot of deductions then you are going to have a harder time qualifying for a loan. You have to be more conservative in your business deductions, which is hard in this economic climate. Bottom line: pay more in taxes to qualify for a larger loan.

4. Declining income is a red flag for an underwriter. If your business is still reeling from the economic tsunami of 2009, getting a loan can be even more difficult. Lenders will only use the lower of the two years of income to qualify you if, for example, 2010’s income is lower than 2009’s. We can make exceptions for declining income for a health issue or call to active duty, for example. E-mail with your particular circumstance and we can work through your particular situation.

5. The higher your credit scores are, the better chance you have of getting a higher loan and qualifying for more. Reducing credit card debt is one of the easiest ways to improve your credit score, since credit card debt has an immediate impact on your score. Work with a credit repair company to get rid of any inaccurate information and make sure you check your credit scores regularly.

For more information or a free pre-approval please contact me at gbusch@fsavings.com or call me at 202-256-7777.

1 Comment
  • If you are in a home and want to refinance, 2 things are absolutely key. First, you must have meaningful equity in your home. Second, you must have a good credit score. But in this economy if you do not have both of them still you could get a good rate, Search online for “123 Mortgage Refi” they gave me the lowest rate of 3.45% my credit history is not so good.

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