1. Being self employed is a lot of people’s dream. Being able to call your own hours, be your own boss, take vacations when you want, earn as much money as you want to earn, write offs on your taxes, etc. For most people though this is hardly the case. Most people that are self employed do not mind working more because they usually like what they are doing. Most self employed people struggle to get their businesses off of the ground and most do fail either because of poor planning, under funding, or lack of will power to keep on pushing.
2. Besides all of the issues to get your small business going where it really hurts self employed people the most is trying to get financing for anything. If you just quit your day job and are going to go at your small business 100% than you better be ready for some tough love from the banks.
3. Banks do not like self employed people. It is really hard to get somebody approved on any kind of financing because there are so many loopholes involved with running a small business. The biggest loop hole is the one that self employed people enjoy the most, the tax write off. Small business owners write off everything and anything that they can so they hopefully can pay less taxes at the end of the year. I do not blame them, I hate paying income taxes too and wish the income tax would be removed from our way of life. It would just make things simpler. Unfortunately, the U.S Government does not like simple and this screws everybody.
4. The biggest reason most self employed people get shot down when applying for a new mortgage is that they had been self employed for less than two years. The banks and lending institutions know that most small businesses fail in their first two to three years and want to see that you have a history of bringing money into your business to cover your expenses. If you can prove that you have been in business for over two years with a license or certificate than you pass the first test.
5. Here comes the nail in the coffin. You prove you have been in business for two years or more, now you need to prove on your income taxes (1040s) that you can qualify for the mortgage. Your mortgage banker or mortgage broker will ask to see those. Let’s assume that you run a landscaping business and the business brought in $100k in revenue each of the last two years. After paying employees salaries, rents, health care, 401k, gas, maintenance, food, and any other small bills it says that your taxable income is around $17k. The $17k number is what the mortgage company is going to use to qualify you on the loan. As we all know, $17k is not going to qualify you on anything. I hope you are married and your spouse has a job where they get a W2 every year because that is going to be the only way you can maybe get approved. I think it kind of sucks that the small business owner is doing everything they can to break away from Corporate America to live their wn life, but the tax man is still going to stick it to them one way or another.
6. So your loan application gets denied in underwriting, now what do you do? At this point you only have two other options that will hopefully get you qualified on the mortgage. You need to have a credit score over 720 and be bringing a lot of money to the table to close. I have even hear now that some mortgage companies are making self employed people escrow their property taxes and home owners insurance. I think this is a sham and the reason they do it is because it makes the home owners stay current on all of their bills. Most self employed people know that all that they are good for on paper is their credit score. Lose your high credit score rating and say good bye to getting any kind of financing in the future. It is impossible for a self employed person to get a mortgage with bad credit scores.
7. Some mortgage companies have loans designed for people that are self employed. These loans are by far the hardest to get approved on now and more than likely have been removed from all mortgage lenders list of products. If you do some searching you might be able to find one that does it but when the U.S Government stepped in and said that everybody needs to show proof of income it killed this loan. How the loan works is that you qualify based on your credit score over 720 and a loan to value under 90%. So if you were a small business owner looking to buy a home you would have to put down 10% and have great credit. All that the mortgage company would ask for is a proof of ownership from your business like a license or even a letter from your accountant saying that you have been self employed for over two years.
8. I remember that the loan we had at the time was called a “Quick And Easy” and it was common place to say that every time somebody got on the phone and said they were self employed. The rates on these loans are comparable to a conventional 30 year fixed mortgage but maybe .25% higher. It was worth it for the self employed people to take this loan because it got rid of any hassle that might come up during the underwriting process. Mortgage bankers and brokers knew ahead of time to go over what the client told them before sending those documents to an underwriter. How it works at major companies like Quicken Loans, Countrywide, Chase, and Bank Of America is that whatever you send down to the underwriter is what they have to go off of. If you send them 1040s that disqualify them with their debt to income ratio (DTI) the loan is dead and you have unhappy clients. Best bet would be to sell your clients on the fact that this is their best option because they do not have to prove anything. As long as the appraisal came back in at what the client said then those loans closed in less than two weeks.
9. Self employed people, small business owners, and anybody that makes a living earning tips like servers or bartenders better know how to save money. This is going to be the only way most of them are going to get approved on a mortgage. They need to have a lot of money saved up for a down payment and about 6 months worth of liquid assets as reserves. Mortgage companies like seeing that you have lots of money laying around to make your mortgage payments in case you come across hard times.
10. Right now it is harder than ever for self employed people to get a mortgage. The lenders a tightening up their guidelines every day. I think this is great for the economy because it takes people that should not own a home out of the picture and will teach us a great lesson about responsible lending practices. If you are self employed you should probably call up your local bank or credit union and see what they can do for you. If not, a larger mortgage lender like Countrywide, Quicken Loans, Or Chase will tell you what or if anything they can do. More than likely they will not have the loan available like I discussed above left anymore but at least they will tell you if you need to bring more money to close, pay off some bills to bring your credit score up, or something else.