Loan Application Process And Self-Employed Borrowers

An article on CNBC this morning entitled, "Self-employed? Good luck getting a mortgage" caught my eye.  Tomorrow I will be doing my first mortgage application with a potential borrower who is self-employed.  I asked the lady to bring the usual items, last 2 years of tax returns, bank statements, and retirement account information.  She volunteered to bring the tax returns for her company which is a charitable organization.

According to the report by CNBC, more lenders are likely to respond to requests for rate quotes from "employed" individuals than would respond to requests for rate quotes from self-employed people.  Lenders apparently do not want the extra hassles that go along with taking an application from a self-employed individual.

In addition, some lenders (at a minimum) look at both individual as well as corporate tax returns for self-employed individuals who own the entity through which they do business.  While my potential borrower has volunteered to bring her corporate tax returns, I was not informed that we needed to see those at least at this point, although, I can see where a lender might want to look at those tax returns at some point in the approval process.  However, I do not see that as creating "way more paperwork" as indicated by a quote from a mortgage lender in the report.

One self-employed borrower indicated that the lender "googled" her as part of the loan application process.  That is a practice that I have not heard is being done by lenders on a wide-spread basis.

There is no question that it is a little more difficult to verify the income of a self-employed individual than an "employed" individual who can come in with a W-2 and pay stubs.  A lot of self-employed individuals do get creative with their accounting and some expenses that are taken as business deductions on tax returns may benefit the individual more than the business, and the lines between business income and personal income can get blurred with creative (or less than professional) bookkeeping.  A lender does need to sort through some of that accounting to determine the potential borrower's ability to repay the loan, no doubt.

Perhaps as my experience with self-employed borrowers increases I might see a reason to avoid self-employed borrowers, but at this point, I really don't see a legitimate reason to avoid self-employed borrowers due to an increase in document review and a little more work to substantiate an ability to repay.  It seems to me that mortgage lenders and brokers signed on to the job willingly, and at times the job may be a little tougher than others, but aren't all meaningful jobs like that?  I would guess that representing certain sellers or buyers may be more difficult than others, but that is no reason to turn clients away.