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Home Loans For The Self Employed? Good Luck

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Back in 2006, getting a mortgage to buy a home was about as easy as buying a tub of butter. Except, well, you actually had to PAY for the tub of butter upfront, whereas you could get a loan for the house. Even for the self-employed, there were NINA (no-income no asset) no-doc loans, or SISA (stated income, stated asset) loans that with the right credit score, you could qualify for. Heck, even with a bad credit score, you could still get a loan (granted your interest rate was higher).

Now that times have changed, what can a self-employed person do to even have a chance at getting a home loan?

1. Lots of Cash to Put Down

20% is the new 0%

2. Perfect Credit

The days of getting a loan without good credit with a conventional mortgage are over. Your only, and best bet if your credit blows is an FHA mortgage.

3. Documents, Documents, Documents

Lenders are going to want to see not only your last two years tax returns, but they may even ask for bank statements for the last 12-24 months of your business. You need to be able to show without a shadow of a doubt that your income stream is going to continue to be profitable into the future. If your business is less than 2 year old, you’re probably out of luck.

I actually talked with a bank loan officer last summer, just to look at the possibility of ever buying a home again. I just gave up after the meeting. In another year or so, I may go back and look at the possibility again, but for now at least, even getting a mortgage would be impossible for me.

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    • Marie

      I am a self-employed person, and I had no trouble at all getting pre-approved for a home loan last month. With the exception of the 12-24 months of business bank statements (which I was not asked for), I think most of those things are in line with what anyone getting a home loan is asked for these days. Reasonable down payment? Yes. Good credit? Yes. Proof of income (via taxes, for self-employed)? Yes.

      The mortgage person I spoke with said that the common problems with self-employed people are not being able to prove the income they claim, either because they haven’t been in business for very long or because they declare enough losses on their tax returns that they show a low/no income. If you pay your taxes and you’ve been doing it for awhile, it’s a non-issue.

      Forgive me for being blunt, but I think you’re generalizing your own experience as a self-employed person who declared bankruptcy and who had to short-sell a house, both in the not-too-distant past. You’re in a more unique position, and your challenges are not ones that every self-employed person faces.

    • http://www.debtkid.com debt kid

      Marie, that’s great to hear! Did you go through a bank directly or a mortgage broker? Would you mind sharing more?

    • Marie

      I’ll be using USAA, but I also talked with an mortgage banker that my realtor knows. There really isn’t that much to share. I called to ask about getting a pre-approval, they asked about my income, debt, and expenses, ran a credit check, asked about the kind of down payment/loan amount I was thinking about, and said that I was in good shape. When I look to go under contract, I’ll have to supply copies of my last two tax returns, along with the rest of the paperwork.

      So far, t’s been a lot easier than I expected–I thought that it would involve a lot more hoops. It probably helps that I’ve been in business for more than 5 years, have set aside a down payment, and am not looking for a jumbo loan or something that’s out of line with my income. At least based on my experience at this point, being self-employed doesn’t necessarily cause problems with getting a mortgage.

    • http://www.thepennywisefamily.com jessica

      Try Churchill Mortgage. They do manual underwriting.

      We went through our bank when we refinanced this summer. I’m self-employed but my husband is not–they used my retirement accounts as sufficient assets to qualify us for the loan when combined with my husband’s income. They didn’t even have to get into all my books for my small business. And my retirement account wasn’t all that impressive, so you might just need to try a mortgage company that has a different process.

    • Umm…

      Jessica,

      You do know that most (if not all) of the mortgage companies are correspondences, which are simply front brokers with a real bank behind as the actual funder?

      All mortgage companies pretty much have the same process, except a few dime in dozen, and you pay the premium for those.

    • Chris

      What Debt kid said is absolutely true, it is almost impossible to get a mortgage for self-employed right now, period. Marie, I know you get the pre-approved, same was I, but if you go through the full process and try to get a commitment letter from your bank, then you will see the problem. Pre-approved means nothing, they have no obligation to lend you the money at the end, only a commitment letter counts.

    • samwalt

      Marie,
      The pre approval is just worth the paper it is printer on. I have personal experience where my assets were great, i have w2 from my own business but still cannot get a confirmed letter. We were willing to put more than the required 20% seems like doing a job for a big company and making half of what you make is the way to go for a loan…..

      Sad but true.

    • selfempl

      I am in the same boat as samwalt.

      I was just denied by BofA, because my business has been only around for 1 year. They want to see 2 years. They don’t care that I am in the same line of business for 15 years, make 2.5 times more money than I used to when I worked for large corporations, ready to put 30% down, have great retirement and real assets, and can show papers that I have steady work for next 3 years.

      I guess we can understand where they are coming from. But I am thinking there are underwriters who understand the risk a bit more at depth. So, let’s share notes!

    • CC

      We also received pre-approval from an aggressive local bank. We made an offer on a house, completed inspections and then discovered we were a small amount short over the course of four years of business. We sold a much smaller business in a dying area (but made good money at it) for a larger business for better money and growth opportunities. We are now just a few months shy of the two year mark with our new business, have 25% to put down and make high 100s. The former owner of our business had no debt and made $350k per year but looked poor on paper. I will go back to my old house seven hours away and live in a suitcase when I’m here. Be careful of the people that tell you “this is no problem” or “You have a GREAT business, no sweat”. The come on and the sales pitch did not match reality. The local bank judged us just like any other bank would. We weren’t even going to try if it weren’t for the big sales pitch.

    • http://www.poorgradpoorstudent.com support

      I agree with debt kid as well – the bank does not realize that we have large development costs upfront that chips away income and those expenses may not be present as time progresses.

      cannot believe they dont evenhave anyone to take care of you in branches anymore. There is this bat that goes around several areas and yu have to get in touch with on phone and then setup stuff!

      BOL, scott

    • Jon

      I just ran into this problem too. The big problem is that lenders have decided to now look at net income reported on your tax returns. This means that when we file our taxes and take all those write offs right off the top, we pay less tax but it hurts our ability to get loans. It’s really strange that for a person working a job they consider gross income but for us net income. It is silly, but just plan ahead…when you file taxes only take enough loss claims to keep your debt to income ratio at around 20 to 30 percent. My bank told me that when I file taxes this year to make sure my ratio is around 30% and they would have no problems giving me a loan especially if I pay down my auto loan by then as well.