NY Times weighs in on difficulty of obtaining a mortgage for self-employed borrowers…(Hey! I’m in this boat!)
Courtesy of the NY Times…
A Tough Time for Self-Employed Borrowers
By BOB TEDESCHI
Published: May 12, 2010
MOST borrowers are facing a much tougher mortgage environment than a few years ago, but for those who are self-employed or own small businesses, maneuvering through a loan application can be even more arduous.
Before 2008 these borrowers, many of whom have difficulty documenting their income, often used what are known as stated-income loans. Lenders focused on credit histories and earnings estimates, circumventing the need for pay stubs or W-2s.
But during the mortgage crisis, stated-income loans became known as “liar’s loans,” because some borrowers falsely inflated their incomes, and qualified for more than they could afford.
Today, stated-income loans have nearly disappeared. Those still available through regional lenders like Hudson City Savings Bank come at a cost: interest rates around a quarter of a percentage point higher than conventional loans and down payments of at least 30 percent.
The self-employed borrower’s only choice, mortgage brokers say, is to submit two years’ tax returns and hope that they qualify for a conventional loan.
That would not be a problem, the brokers said, if all self-employed people filled out their tax returns conservatively. But in this economic climate, the self-employed have been more likely to lighten their tax liabilities by taking business deductions, thereby lowering their official income levels, as well as the likelihood of qualifying for a loan.
“You have to be more conservative about how you claim your deductions, or how you approach unnecessary purchases for the business,” said Robert Duquette, the president of the New York Association of Mortgage Brokers.
Mr. Duquette says that self-employed borrowers will have no trouble qualifying for loans if they have significant cash, as well as credit scores of at least 700, and stable and significant profit for the previous two years.
But many small-business owners, hit by the recession, are showing losses on their income tax statements.
“Of course, a borrower can make an argument for extenuating circumstances, like reserve duty for a few months, or a temporary hospitalization,” said Regina Mincey-Garlin, the president of RCG Mortgage Solutions in Montclair, N.J.
Mr. Duquette of the New York Mortgage Brokers Association said the mortgage crisis had hurt small-business owners more than others. “Everyone who’s getting income from places other than salary and wages is getting hit harder than everyone else,” he said, “because they’re being scrutinized more carefully.”
And those who have only recently started a business — perhaps after a layoff — may face even greater difficulties, he added. During the recession, many companies laid off workers, hiring them back on a contractual basis. Because these people have no long-term history of stable earnings, Mr. Duquette said, lenders often reject their applications or impose higher rates.
Still, self-employed applicants shouldn’t give up hope, said Debra Killian, the president of Charter Oak Lending, a mortgage broker in Danbury, Conn. Many people wrongly assume they cannot qualify for a loan at all, she said, “but 30 percent of the time — maybe 40 — they’ll qualify. They may be frustrated at all the documentation we ask them to provide, but they can still qualify.”
Small-business owners considering whether to qualify a purchase as a business or personal expense on their taxes, Ms. Killian said, should do the math.
If a business owner shows too little net income to qualify, say, for a $300,000 mortgage at 5 percent, and instead qualifies for a 5.25 percent loan, the monthly payments add up to an extra $5,520, roughly, for the first 10 years of the more expensive loan.
“If you save yourself a few thousand dollars in taxes in a year by taking those extra deductions,” Ms. Killian said, “how much will that cost you on your mortgage, or your ability to even get a loan?”