Mortgages Less Easy To Come By For The Self-Employed
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Low interest rates and great deals on real estate may make it a buyer's market, but the self-employed are getting completely frozen out of the mortgage process. NY1’s Monica Brown filed the following report.Just a few years ago, at the height of the housing bubble, it seemed mortgage loans were being approved for anyone and everyone.
“I was stunned at what was being done. Banks were giving 103 percent financing with no income verification. We really made a mess,” says Manhattan Mortgage Company chief executive officer Melissa Cohn.
In the wake of that subprime mess, with the economy grinding to a halt, the loose lending practices are now a thing of the past.
But according to Cohn, the stricter lending is freezing the self-employed out of mortgages completely, even though many of these potential borrowers have with sufficient income, stellar credit, and at least a 20 percent down payment.
“In fact, there are many people who signed contracts a year or two ago, especially in these new condominium buildings, who expected to get 80 percent financing, and signed contracts on the basis that they would be able to get the 80 percent,” says Cohn. “And are now they’re finding that they don't qualify for a mortgage they would have qualified for a year ago.”
People who own their own business do not receive a W2 from an employer to document their wages. For proof of income, they have to rely solely on their income tax returns, but with big deductions, their income is significantly reduced.
Cohn says in the past, self-employed people took so-called "stated income" loans, which estimated the borrower's annual salary. But during the housing boom, those loans expanded in popularity, and in some cases, completely exaggerated incomes. These days, many banks have stopped approving stated income loans altogether.
Still, with interest rates low, experts say the guidelines for approval may ease again.
“If you're self-employed, it's really important that you maintain impeccable credit,” says Cohn. “Really for anyone, you have to maintain good credit and really accumulate as much liquidity as you can. I think saving is really important, and the more that you can show by way of assets and saving would be a big plus in getting you approved for financing.”
Beyond that, the self-employed must wait to see whether their credit market improves.