Some loan providers prefer not to deal with self-employed borrowers, because getting them qualified and approved is more complicated and onerous than with borrowers who work for a salary. But there are plenty of others that welcome business from the self-employed.
A major problem with lending to the self-employed is documenting an applicant's income to the lender's satisfaction. Applicants with jobs can provide lenders with pay stubs and lenders can verify the information by contacting the employer. With self-employed applicants, there are no third parties to verify such information.
Consequently, lenders fall back on income tax returns, which they typically require for two years. They feel safe in relying on income tax data, because any errors will be in the direction of understating rather than overstating income. Of course, they don't necessarily feel safe that the W-2s given them are authentic rather than concocted for the purpose of defrauding them, so they will require that the applicant authorize them to obtain copies directly from the IRS.
The second problem with lending to the self-employed is determining the stability of reported income. For this purpose, the lender wants to see an income statement for the period since the last tax return and, in some cases, a current balance sheet for the business.
The two government-sponsored enterprises that purchase enormous numbers of home loans in the secondary market, Federal National Mortgage Association (aka Fannie Mae) and Federal Home Loan Mortgage Corporation (aka Freddie Mac), have developed detailed guidelines for qualifying self-employed borrowers. Lenders looking to sell such loans to the agencies must follow the guidelines. The problem is that implementation can be complicated and time-consuming, especially when the declared income comes from a corporation or a partnership. If you own 25% or more, you are considered as "self-employed."
Most lenders offer "limited documentation" or "reduced documentation" loans to self-employed applicants who cannot demonstrate two years of sufficient income from their tax returns. These programs vary from lender to lender, but they all provide less favorable pricing and/or tougher underwriting requirements of other types. Lenders invariably require larger down payments, and may also require a better credit score or higher cash reserves. In addition, they may limit the types of properties or types of loans that are eligible.
The bottom line is that the system does service self-employed borrowers. While the hurdles are somewhat higher than they are for borrowers who work for third parties, the self-employed are also a highly resourceful group. If they can't get satisfaction from one mortgage broker or lender, they'll keep shopping until they find one who can meet their needs.
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