Self-employed find it’s not easy to get a mortgage
By Tim Logan, Los Angeles Times
Despite often earning higher incomes, self-employed borrowers have a harder time getting a mortgage than their salaried peers, according to a new study out Thursday. And as the ranks of the self-employed grow, that’s hindering the housing recovery.
People whose primary income comes from self-employment receive 40 percent fewer loan quotes than the average would-be borrower, according to data crunched by real estate website Zillow.
The biggest reasons why: lower credit scores and more complex paperwork to verify income.
Interesting article, but it didn’t explain some stuff; like WHY self-employed people with such large incomes have such low credit scores. I’m self-employed, and I make WAY less than the $145K they say is average. But my credit score is 740. Maybe parents need to start working on teaching their kids how to handle money, banks, and credit when they’re young like mine did. I will be eternally grateful to them for the lessons.
Dog, many of the newly self employed may have high credit card debt with multiple cards. They may have used their cards to finance their business, a lot I know will use their cards to pay expenses and pay the card off monthly which may not be reflected in the score due to timing of reporting. Some will have judgments that haven’t been correctly reported to the credit agencies. Many may have collections that occurred when they were struggling with starting their business, which may be 7 years old. Never pay off an old collection if you are buying before the lender gets your loan approved, because if you do your credit score will drop as the reporting date will then be fresh. The main problem with the self employed is that they write off so many things so their income is artificially low. Also they may have business loans which can be included into their debt to income ratios and inexperienced loan officers may not know how to back that out as well as depreciation expenses from the schedule C.
The Lender is also looking at self employed people’s tax returns. I know several self employed people that keep two set of books. They actually make the income to qualify for a loan but on their taxes they show a lower amount to avoid taxes. So even though they have the income, the lender has to go by the income reported to the IRS.
I find that interesting, due to the fact that all the self-employed folks I know are very busy, while us folks that work for employers/companies/corps, etc. are out of work!
How about saving up for a decent down payment of 20 or 25%. The lending industry is starting to offer very low or no down payment just like before the last big housing and economy crash.
Dog’s point about educating the younger generation about handling money and the realities of finance is well taken.
The biggest and most important point the article made was, in my opinion, the one about mingling business and personal things in one set of books or tax returns making it hard to figure out what real income is.
The second most important part is the inexperience of many loan officers and brokers. Some are not even financially trained, and arebasically box checkers, only looking for easy applications so more can be done in a day.
Semi-retired now, I have been self employed before and that really is a red flag to the loan industry.
You sometimes get the idea that self employed is a shifty way to make a living and you are often treated like a possible crook and not trustworthy.
Personally, I believe the self employed with a track record of income are likely a better risk than salaried or hourly people working for small companies or even huge ones.
For instance:
You only have to go as far as stateline to find a huge company mired in debt, laying off or demoting long term employees to part time/no benefits positions.
Do you think many of those Ceasar’s employees would be seen as a good risk for a mortgage?
Economic recovery indeed! At least half the evidence for a recovery is pure BS.