Cope With Discrimination Against Self-Employed In Mortgage Lending

Federal Fair Housing Act stipulates the following discrimination in mortgaging lending illegal: race, color, national origin, religion, sex, familial status or handicap (disability). I think the law is not going far enough, it ought to include discrimination against self-employment.

As I disclosed in the previous article of this series, http://www.debtkid.com/my-journey-to-get-a-mortgage-loan-the-beginning, my wife has been working for a company and I have been self-employed, each with a long and stable history. I have been paying myself around $100,000 a year and my wife has a gross income somewhat less. Even though we are not a straight self-employed family,  he extra scrutiny I received during the loan application made me think that self-employment is heavily discriminated.

Unlike some other people who do not qualify for a loan because they take business deduction aggressively and in the end show very little business income. In doing so, they can minimize tax. Unlike wage-earners, self-employed people actually had to pay twice as much tax on social security tax. So the incentive for people to deduce as much as expenses legally and pay themselves as little as possible is definitely there.

I, on the other hand, have been proudly paying myself a very comparable wage and paying the government whatever taxes that were due.

There are people suggest that instead use net income on the business, lenders should use gross income to qualify self-employed. Maybe during the hay-days of real estate bubble, but we are in 2014. Now, it is in only in one’s dreams.

Oh, Lord, just one more bubble!

Aside from my personal tax returns, I also submitted W-2 forms and the K-1’s for the two LLC companies that I own shares in for both 2012 and 2013.

There are actually three companies under my control and I will explain one day how I ended up with so many companies.  But that is not enough, the lender also requested the tax returns for the past two years of the three companies that I own. So there are 6 pieces documents in addition.

I admire their thoroughness in requesting documentation. If you think about it, in the paper trail, personal tax returns have to agree with the W-2’s, which have to agree with the tax returns of the companies; also, the K-1’s have to agree with the tax returns of the companies.

Any discrepancy could invite questions and demand explanations, but in my case, they all agree with each other.  Lucky me.

And the lender do not just want to take my word for it, they had me sign T4605’s so I give them permission to obtain copies of my personal tax returns as well as the tax returns for each companies from IRS. That is four pieces of extra paper I had to sign and submit.

So after all these work, you will think they would show that I have about $100,000 in annual income?

Wrong!  Somehow they think I will make about $56,000 each year based on the documents I submitted.

The mortgage broker could not explain to me what kind of math they used.

If you are self-employed and looking for buying a house on mortgage, from now on for two years, do the following:

  • Be less aggressive on your business expenses deduction,
  • Pay yourself a decent wage,
  • And finally, keep good documentation, for you definitely need it.

I will disclose who the lender is once the deal is closed.  We are closing on the house this week.

Accidentally, debtkid version 1.0 also had a piece on this subject. Check it out:

http://www.debtkid.com/home-loans-for-the-self-employed-good-luck

 

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