Bankruptcy

Mortgage Application Guidelines Tough for Self-Employed

By Chris Kramer

During the real estate boom that caused the housing bubble that eventually sent the country into a serious recession, it was common practice for borrowers to apply for a mortgage by using "stated income," which meant indicating their income without offering proof.

But mortgage lenders have learned their lesson and now, according to the New York Times, qualifying for a mortgage loan is harder than ever for those working for themselves.

Providing Proof of Income

In order to convince a bank to lend you the money to buy a home, you have to prove that you can afford to repay it. Generally, that entails showing official records of your earnings and current credit situation. People who work for themselves or own a small business, though, may not have regular paychecks to present, which may mean:

• Higher interest rates: According to the Times, the few banks that still extend stated-income loans charge significantly higher interest rates than they do for standard loans. From an economic perspective, this makes sense: when there?s a greater risk involved, there must be a greater potential gain. But it can mean a much more expensive loan for borrowers.
• Careful bookkeeping: Some banks will apparently initiate loans with two years' tax receipts, but this might also present a problem for some self-employed borrowers. It seems that, in order to offset losses in the rough economy, many people have been taking liberal tax deductions, thus lowering their overall reported income. This, naturally, could hinder their ability to qualify for a large loan.
• Solid finances required: One expert quoted suggested that self-employed borrowers with considerable cash reserves and credit scores of at least 700 should be able to get traditional loans, but those who have lost income (or filed bankruptcy) during the recession may have difficulties.

But, according to the piece, self-employed Americans shouldn?t despair. It seems that as many as 30 to 40 percent of those who work for themselves qualify for mortgage loans they apply for. If you aren?t sure how your finances currently look, consider starting the mortgage application process by viewing your credit report (for free) at www.annualcreditreport.com.

Additional Resources

Understanding Your Mortgage Loan (PDF)

Practical Guide to FHA Lending (PDF)

Full post as published by The Bankruptcy Blog on May 20, 2010 (boomark / email).