You Can Qualify for a Mortgage III – Self employed?
By Keith Rockmael
In addition to “boomerang” buyers – people who previously went through a foreclosure or short-sale and are now back in the market to purchase a home – self-employed borrowers continue to have the hardest time qualifying for new loans. The primary issue is how lenders calculate their income for qualifying purposes. Loan officers have to use the net income (tax return based) averaged over a two year period. If the income shows declines then lenders normally need to use only the most recent lower year for averaging.
Scott Eaton a Certified Mortgage Planner with Summit Funding says, “The guidelines don’t allow for a lot of things to be added back into the income number from their business profit and loss. Many business leaders are running a lot of expenses through the business in order to minimize their tax liability.” To make matters worse, most self-employed file taxes on extension in October each year.” Eaton adds, “The only way we are then able to factor in the previous year’s income is if their CPA will sign off on the company’s profit and loss and balance sheet. This is something they do NOT do, ever. Their insurance does not allow them to do it without basically going through an extensive and expensive audit.”
The second strike against self-employed borrowers comes with the corresponding load of documents required. The extensive paperwork required can range from a copy of their corporation returns, in addition to their personal returns, to validation of bank accounts being used by the business and proof that they own the company. If the buyer wishes to use some of the funds for their real estate needs, then the guidelines require them to get their CPA to attest that use of the funds will not adversely affect the operations of the business.
For many bankers the issues circle around the added bureaucratic paperwork. Daniel Stevens, a private mortgage banker with Wells Fargo mentions, “The biggest change now is the bureaucracy added from the Financial Reform Act. There are many more forms required upfront now, as well as signatures on most documents prior to a clear to close. The solution is the usual: Have the borrowers expectations set up front very clearly by the loan officer and be very organized during the pre-approval process to request everything upfront.”