Previous reports state: Despite often earning higher incomes, self-employed borrowers have a harder time getting a mortgage that their salaried peers, according to a new study out Thursday! And as the ranks of the self-employed grow, that’s hindering the housing recovery.
People whose primary income comes from self-employment received 40% fewer loan quotes that the average would-be borrower, according to data compiled by real estate website Zillow.
Many lenders say that it’s so much more paperwork intensive. Some lenders are wary of going through the extra work it takes to underwrite the self-employed.
But there is hope…and the fact is, the easy qualifying loan process of ‘yester-years’ are gone and today it is far more difficult for anyone to get a loan. Yes, self-employed borrowers have a little different process in order to qualify for a loan, but don’t be discouraged from all the hype and negative articles.
Keep in mind there are ways to prepare yourself to buy a home if you correct or confirm a few important items.
1. Separate home and business:
Have good company records and don’t mingle funds with personal and business monies. Lenders have explained that when business owners mingle their personal and business balance sheets, it dampens credit scores and leads to bigger swings up and down in annual income.
Lenders often talk with buyers who earn high ‘gross’ incomes and have just one bank account. The separation of business and personal costs are sometimes time consuming and difficult to breakdown when you are qualifying for a home. Lesson here is to always use business account for business and a personal account for home.
2. Face the facts:
A large number of self-employed buyers can show a higher ‘gross earnings’ yet year after year, they report a significantly lower ‘net earning’ on their tax returns. Yes, there are many ways to save taxes as a self-employed person, although by ‘squeezing’ every possible write-off and reducing your company net will in the end hurt your ability to qualify for your dream home. This item alone is the main reason more self-employed people do not buy.
Joe’s company grossed over $250,000 last year and his net was only $86,000. He aggressively found every opportunity to reduce his net earnings and this hurt him when he needed to qualify for his new home. Be reasonable on your deductions so that you have a true estimate of your earnings and living expenses.
3. Become a company employee:
Consider paying yourself a salary instead of dipping into the company profits for miscellaneous expenses. Those that have controlled spending habits within their budget will have an easier time with the qualifying process.
Some may be reading this with the intention of not buying, rather refinancing their home because of the drop in interest rates. The facts remain the same, self-employed borrowers need to have good records and show positive net earnings in order to qualify for a loan.
4. Monitor your score:
Reports show that many of the self-employed who sought loans in 2013-2014 reported higher earnings than their salaried friends, although they were twice as likely to have a credit score below 680. So, protect your credit scores in order to obtain the best interest rate.
5. Not all lenders can help you:
When it comes to finding the right loan…as a self-employed borrower, not all lenders or banks can provide the proper guidance or level of service one would expect. Banks often have ‘cookie cutter’ programs that make it difficult for a self-employed person to fit into, while other lenders simply lack the experience to handle the process.
Scott Cary works with the best lenders in the area that specialize in loans for the self-employed. So if you are ready to buy now or simply need guidance in preparing for a future purchase, Scott advises you to call today and get connected with the right loan professional.