Qualifying Mortgages For Self Employed Borrowers | Propertylogy

Qualifying Mortgages For Self Employed Borrowers

By on May 31, 2019

People intuitively think that those who are self-employed would find it easier to obtain loans as they run their own businesses.

Well that can be the case when they are running huge businesses that enable them to bank in hundreds of thousands a year.

However, the truth is that most self employed borrowers make about the same amount of money as the average person.

The only difference is that they generate their own incomes instead of collecting a salary from an employer.

In truth, the lending system actually makes it more challenging for the self-employed to obtain mortgage loans as well as refinance them.

Income verification

The primary reason for this is that their personal income is difficult to document and verify.

On top of that, personal income can be volatile. Compare that to the stable income an employee has.

Because of these factors concerning income, lenders tend to be more prudent when it comes to approving home loans for self employed people.

This is why when people run their own businesses, they are often required to provide income tax statements for the most recent two years prior to the loan application.

But this does not end the lenders’ suspicions.

Because W-2 forms can be faked, a lender can only feel somewhat safe when the borrower borrower explicitly authorizes them to inquire about their tax statements directly from the IRS.

The irony is that the lack of good faith on the part of the lender might not end there.

Because those who are self-employed could very well overstate their income and voluntarily pay a slightly higher personal income tax for the sake of obtaining a huge mortgage.

Personal bank statements might then be requested.

But if a borrower is truly out to pull a fast one, surely he has this covered as well by depositing cash in his account beforehand.

As you can see, there are a lot of loopholes that a self-employed person can exploit if he knows what he is doing.

And even the most sharp-eyed credit analyst can be led to believe something that’s not as true as it really is.

Tighter underwriting

This is why even if a lender is able to obtain ALL the documents they want from a self employed home loan applicant, they would still create a buffer for themselves to fall back on in case things go south.

This buffer can be in the form of a lower loan to value, higher interest rates, a discount on the personal income when calculating debt ratio, etc.

For example, an income of $5,000 might be discounted to $4,000 for prudence.

Yet despite all these additional hoops people have to jump through during qualification, a logical person should be able to understand that these are all meant to deter mortgage fraud, especially with stated income.

In addition to all these, Fannie Mae and Freddie Mac have strict guidelines in the qualifying of home loans for self-employed borrowers.

Lenders might choose not follow them. But if they intend to sell the loans to the two government-sponsored organization, they’d better.

When income is not enough

With the various ways lenders are undermining the personal income of those who are self-employed, it’s no surprise to find that a lot of such borrowers are unable to obtain the mortgages at their requested loan amount or LTV.

This is even when they feel fully capable of servicing the debt comfortably.

In such situations, borrowers might have to turn to no-documentation loans.

These types of mortgages basically enable borrower to obtain home loans without having to provide any income documentation.

While these loans might be easy to obtain approval for, do take note that self-employed borrowers should be prepared to pay more points or higher interest rates.

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