While mortgage rates remain at record lows, major news corporations have continued to report on how much tougher it has become for borrowers to get approved for home loans today. So what options and mortgage help is really available for the self-employed right now?
Business owners and other self-employed individuals have often found it more difficult to obtain mortgage financing than their salaried counter parts. This is largely due to the income and employment verification requirements and underwriting guidelines which need to be adhered to. Unfortunately, while these individuals may enjoy great income levels, verifying income can present an array of hurdles when it comes to getting mortgage help for the self-employed.
Even those who have established businesses and verifiable evidence of their income have been held back due to the way in which their income is calculated by lenders. This is because most lenders and loan programs base their income on the net, adjusted gross income on tax returns, which obviously is kept as low as possible to minimize tax liabilities. It is a catch-22 situation. Take fewer deductions, show more income, qualify for a larger mortgage and pay more taxes, or take as many deductions as possible and limit your home loan options.
During the recent housing boom we saw the introduction and growth of stated income mortgage loans. Sometimes demonized in the press as “liar’s loans” and lumped in the same category of subprime mortgages which were blamed for the bubble, these loans were hugely popular with the self-employed. It enabled them to state their real income without having to pay more taxes and they would get into great stated income home mortgage loans with less money down and better rates.
Unfortunately, criticism and abuse of these loans as well as the ensuing regulations have essentially made stated income home loans illegal for the most part. Laws in states like Florida now specifically require that lenders request and consider proof of income when offering mortgage help for the self-employed.
However, exactly what documents are required to verify self-employment today can vary widely between lenders and the type of loan is being applied for. Those seeking to purchase new homes with conventional or FHA mortgage loans are required to submit copies of tax returns for the last two years and execute a 4506T, which enables lenders to verify them. In order to qualify, the net, adjusted gross income for the last two years is averaged unless the most recent year shows declining income, in which case the lower number will be used. The new debt-to-income ratio (DTI) cannot exceed 50 percent of the borrower’s monthly income.
However, in a recent interview, 20-year veteran mortgage professional, Lenny Silvestri Jr. of Alternative Mortgage Group in Boca Raton, FL revealed that there are more options. Firstly, he pointed out that an experienced and knowledgeable loan officer can help borrowers to increase the amount of their income that can be used to qualify by adding back items like depreciation and salaries which were paid to them through their businesses. Lenny also unveiled the fact that there are some alternative loan programs which will accept copies of bank statements and use deposit amounts to verify income versus tax returns. This is the perfect solution for those who have cash businesses or have been a little slow on filing their taxes or who simply have great accountants who have been able to minimize their tax liabilities. Of course, this type of mortgage help for the self-employed does come with above market mortgage rates, and while it may be a great way to cash in on the many current bargains on the housing market, the pros and cons should be weighed carefully.
It is important to recognize that the rules for refinancing can differ, especially when it comes to mortgage help for the self-employed who qualify under the government’s Making Home Affordable initiatives. A call put into Bank of America’s mortgage hotline revealed that, providing all other eligibility requirements were met, proof of self-employment and income may be simply limited to needing to provide a copy of a valid business license.
The bottom line is that anyone who is self-employed and who is considering purchasing a new home or who is interested in refinancing may find it a lot easier than they think if they take a few moments to speak with an experienced mortgage professional. Certainly, between historic lows on mortgage rates and rock bottom home prices, the opportunities for reducing housing payments and locking into great deals are just too great to let pass by without at least trying to take advantage of them.