Life seems tougher for the self employed and small business owners when it comes to getting a mortgage. The housing sector is reviving and lower rates and alternative financing options are making mortgages more attractive again. However the self employed are not able to take advantage of the benefits.
Hurdles that the self employed and business owners face
There are mainly two problems that are standing in the way of the self employed getting a home loan. First, they have to prove their income with tax returns. Stated income loans are not enough anymore. And business owners and the self employed try to minimize their taxable income, which often does not meet the income required to qualify for a home loan.
Then there is the problem of uneven incomes for the self employed. Add to that the recession that has reduced incomes. Even with stabilized incomes, the two year average of tax returns that banks look at may not cut it. There used to be other options for the self employed to show cash flow in the past, such as bank statements. But just like stated income loans this method was abused too much by people buying homes they could not afford, and no longer applies.
Under the circumstance, it may look bleak for you if you are self employed and looking to buy a home. But there are ways and means for you to secure a home-loan while watching out for the traps. So let’s talk about how to play a mortgage game if you are self employed.
Know what to expect from a mortgage lender
Typically according to a mortgage broker, you are self employed if own more than 20 to 25 percentage of a business. To get a loan, you will first have to show a proof of your declared income. You can use your business accounts or the reference of a qualified accountant as proof. You will usually be asked to show your income for a period of two to three years, though in some cases even one year would do.
Your profits will be taken into account during your assessment. You may also be asked to show proof of future income by supplying information about your business and the clients and contracts you expect to have. You will need to show your Schedule C. Always know your paperwork and have it handy.
Some Immediate Solutions
1. Low doc/ no doc Loans
Low document loans or even no document loans have been around for sometime but people may not be aware of them because they are not heavily advertised. You will find collateral lenders or private lenders in financial listings who offer these types of loans. However, before you get in touch with these lenders, shop around and compare. You will find that fees, terms and rate vary widely.
Collateral lenders stress on asset and credit verification. They may safeguard against foreclosure expenses by taking a greater equity in the property you are buying. This may translate into a higher down payment or an interest in some asset you own. They will also closely inspect your life insurance or bank accounts as a part of asset verification. Always be careful that you don’t find yourself in a situation in which the guaranteed terms and rates are not written down.
2. Meet with a mortgage loan officer
While phone conversations may be convenient, it is better to personally meet a mortgage loan officer. It helps to find an officer who specializes in mortgages for the self employed. They are experts familiar with the system, and can help you find alternate mortgage loans you may qualify for.
Some Long-term Solutions
1. Pay more tax now to qualify for mortgages in the near future
If you are considering applying for a home loan in the next few years and tax day is around the corner, you should consult an accountant as soon as possible. You have to make a decision now, whether you want to qualify for mortgages in the next three years or pay less tax. Don’t write off each and every business expense possible.
2. Sign on as a W-2 employee
This will be possible if you are on a long-term project. Even if you are self-employed, you could sign a contract with a long-term client that would provide exemption from unemployment claims at the end of the project. This will give you the W-2 that banks want.
3. Lower your price range to avoid disappointment
A last resort could be to lower your sights on a cheaper home, and if you expect a rise in income, work towards a larger home in the future.