Most of us in the mortgage and real estate profession are in this boat, and quite frankly so are many of our clients. Here are some tips for the self-employed and for those of us who represent them. I would love to have input from other professionals who have some tools to share...
Step 1: Managing your credit, keeping good financial records and documenting your income are crucial.
Self-employed people and others with irregular income could be caught in a squeeze as mortgage lenders continue tightening lending guidelines in response to the problems in the lending industry.
On paper, self-employed people and owners of so-called microbusinesses with 10 or fewer employees can look like credit risks. Their income can vary widely from year to year. Most don't receive W-2 tax forms, making their income harder to document. And after they deduct business expenses from their income for tax purposes, they can appear to make little money.
With many flexible loans like no-documentation mortgages drying up, self-employed people could find it more difficult to get a home loan.
Step 2: The importance of good credit
The most important thing is to be sure you have a high credit score, known as a FICO score. One should annually checking your credit reports from the three major credit reporting agencies, Experian®, Equifax® and TransUnion®. Mistakes on your credit report can artificially pull down your credit score. Although the mortgage industry uses a slightly different calculation method for credit score, you can get your free reports each year at www.annualcreditreport.com.
If your financial habits are pulling down your credit scores, change them now.
"Credit histories are absolutely critical," Fairbrother said. "If you're looking at getting a mortgage in the next 90 days, you can't fix your FICO score in 90 days. It takes six months, nine months, a year." (For more on raising your score, read our article: Improving your credit score.) Well this is not necessarily true...there is rapid rescore and hiring someone to help, but it costs money. The money may be well worth it if you need to get into a property in a hurry.
Step 3: Keep good records
Self-employed individuals also need to keep good financial records. The better your records the easier time we have putting a loan together for you. You might need to provide both your personal and your business tax returns when applying for a loan, though rules in the industry change on a daily basis. Best thing is preparation in spades.
This is not my personal favorite solution, but I have contemplated it. If you're anticipating applying for a mortgage in the next year or two, consider deducting fewer expenses to increase your net income. Lenders usually require self-employed people to provide copies of their previous two years' annual tax returns.
Lenders now have greater expectations for self-employed people to prove their income. If tax returns don't do that, consider providing an audited financial statement, he said, although getting a certified public accountant to prepare the statement can cost several hundred dollars.
Step 4: Commercial Loans
In NYC, I have many self-employed clients looking for 1-4 family homes an planning on living in one of the units. When getting a mortgage on this type of property proves difficult we look at 5+ unit buildings. Commercial loans then apply and as long as they can swing the 20-30% downpayment, have good credit and the building numbers work we are in. The down side is dealing with rent-stabilization rules, but the upside is they can get in and price per square foot is generally much less.