Stricter Lending Laws Leave Self-Employed In The Cold
May 16th, 2011
Stricter lending criteria are creating a “huge void of buyers” that are entirely qualified for mortgages but are unable to purchase new homes, according to California jumbo loan specialist Sue Drawdy[1]. During the “boom years” for real estate, these buyers were able to apply for loans without showing documentation of their income – this practice was known as a “liar loan” – which enabled self-employed borrowers with no W-2 to show a lender to still borrow money and purchase a home. When the housing crisis hit and the credit crunch followed, these borrowers were left out in the cold, dramatically reducing the number of qualified buyers who had the ability to qualify for a mortgage. Now, some lenders are cautiously expanding their qualification guidelines once again to allow self-employed Americans with good credit and large, verifiable cash reserves to qualify for a mortgage.
Drawdy believes that this is essential to the recovery of the housing market because, she says, many of these would-be buyers “make their payments on time; have ample cash reserves [and] perfect credit.” However, they fail to show “proper income” on their tax returns, with the result that they are “denied loans on a regular and alarming rate.”
One of the biggest issues for self-employed borrowers is that their ability to write off some portions of loans and business losses – a good thing for their business – can create the illusion of a total lack of cash flow when a lender looks at their taxes[2]. Some experts recommend that self-employed borrowers be prepared to submit two or more years of tax returns and to remember that if they are planning on buying a home, they may need to show more income (and potentially pay more taxes) than they would really like or legally need to in order to qualify under today’s lending standards. Not surprisingly, this does not sound particularly appealing to many self-employed borrowers who are opting out of buying conventionally and seeking other methods for purchasing a home.
Do you think that lenders are being reasonable in the way that they deal with self-employed would-be homeowners?
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[1] http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/05/14/prweb8431597.DTL
[2] http://money.usnews.com/money/personal-finance/articles/2011/05/10/overcoming-the-mortgage-obstacle
May 16th, 2011 at 10:00 AM
No they are not. The stated income loans were originally desgined for self-employed borrowers, and how they were underwritten was, they would ask for your tax returns for the previous two years, and they would use the “gross Income” as the stated amount, and underwrite the loan using those numbers. They also required ample reserves to make those loans and really didn’t have much problems with those loans. The industry moved from those underwriting guidlines to not requiring any documentation and that became the problem. The so call sisa loans, “stated Income, stated assets”, become the rage, and thats where the problems came in. If they would go back to the original underwriting guidelines, those would be very good loans from a safety and quality point of view.