Self-employed Homebuyers Find Tough Mortgage Market

iStock_000002944724XSmallYou could say that the banks “threw the baby out with the bath water” when they cracked down on lending practices in answer to the mortgage meltdown.

Self-employed business people suddenly found themselves unable to get home loans because they had no W-2’s to prove their income. And, since most business people do their best to lighten their tax burden, many didn’t have the tax forms to back up their income claims.

Now FHA is stepping in to bring back low down payment / low credit score loans to wage earners who may or may not be able to keep up with payments. But banks are still reluctant to offer loans to the self-employed.

If you’re self employed and know that you will want to buy a home or refinance a home in the future, you need to plan ahead. Here’s how:

First, pay more taxes. By that I mean stop taking every deduction possible, so that your taxable income will go up. And document every scrap of income. I know quick-stop operators who slip the “coffee money” into a can under the counter rather than the till. Other entrepreneurs “forget” to report cash payment for small jobs if the customer isn’t likely to file a 1090 form.

You already know that’s called tax evasion and it’s illegal. But it will also hurt your chances of a getting a mortgage. If you want a loan, you need to show all of your income.

Keep a close watch on your credit report and credit scores. Correct any errors and follow up on signs of identity theft immediately. Read the reports and pay attention to any notes about conditions affecting your scores. Then take steps to protect and raise those scores.

Next, be patient. Banks want to see stability, and they know that a huge percentage of small businesses fail in the first months. So if you’ve been in business for less than 18 months, the only real chance you stand is to have a strong co-signer. Running your business successfully for at least 2 years gives you the best odds of obtaining a loan.

Build your cash reserves. If the bank sees that you have 6 months worth of payments and operating expenses in the bank, they’ll feel much more secure in lending to you.

Beef up your record keeping. And before you go to an appointment, ask the mortgage lender what he or she will want to see – and take it with you.

Apply in person. First, make some calls and locate a mortgage broker who specializes in loans for the self-employed. Then sit down with them in person. Ask questions about different loan programs and help them help you by finding the right program to fit your specific situation. On-line lenders offer big things, but an automated application is not what you need when you’re self-employed.

Author: Mike Clover

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