Can self employed and full commission folks get a loan?

By
Real Estate Agent with Winzone Realty

Personal experience has led me to this week's topic.  My wife runs her own business and I am a full commission loan officer.  It's been frustrating for us in this market because even though we have great credit and money in the bank, we still have trouble finding a loan product tp buy a new house.   Why is it so hard ?  One word: Risk 

If there's one thing lenders are avoiding right now, it's risk.  The riskier you look on paper, the more unlikely it is for you to qualify for a loan.  As little as 1 year ago, consumers that were concidered a bit more risky still had a place to go for a loan.  Now, they may have paid a bit more for the loan, but they could get one.  Now, due to the mortgage crisis and those more risky loans failing, it's hard for anyone that outside the normal box.

Lenders always look at 4 key things when deciding to approve or deny a loan: Credit, Collateral, Capacity, and Capital (the 4 C's)

For the self employed or full commission borrower, the big concern is Capacity.  Capacity is your ability to repay the loan or how much income you have coming in to be able to pay your debts.  This can sometimes be difficult for the self employed borrower.  The universal qualifier for a self employed borrower is that they have had to be self employed for at least 2 consecutive years and to prove thier income, they have to produce the last 2 years of full tax returns.  The Catch-22 they face is that generally, come tax time, they try as hard as they can to find business deductions and write-offs to make their income look less so their taxable income is lower.  This is great for Uncle Sam but not so great to qualify for a loan becuase it looks like you make less money than you really do.

The savior in the past has been the stated income program.  This program allowed you to state your income and not have to prove it.  You could only get this type of loan if your other C's were all in line. These loans are currently a thing of the past and have been dumped due to thier assumed risk in the market.  All of the above rules are generally the same for a full commission earner as well.

So what do self employed folks do right now if there taxable income is too low to qualify?  Unfortunately, not a whole lot.  Until the days of the stated income loan come back, most of these folks are out of luck unless they have another income source. 

Lenders don't hate self employed borrowers and full commission borrowers.  They just don't like them so much.   If they can prove 2 years of solid income and that income is enough to qualify them for the loan, they are in good shape. Let's all hope that this $700 billion bailout plan help to bring back the stated income loan!!

Glenn Kavanagh
Mortgage Planner
South Chase Mortgage

Comments (2)

Jennifer Swanson
Young Mortgage & Investment Group - Apollo Beach, FL
Mortgage Pro

There are still stated programs out there. I am actually working on one right now:

680 min. credit score for 75% LTV

700 min. credit score for 80% LTV

This is for a Purchase or Refi. on a primary or 2nd home, 1-2 units

If self-employed, the business needs to have been running for 2 years

No income verification, assets are verified

IRS form 8821/4506 is req. covering the past 2 years

The rates are not great but it is do-able! Don't get your hopes up just yet.

Oct 02, 2008 12:20 PM
Anonymous
frank

If its no income verification why do they need a 4506?

Oct 15, 2008 06:24 PM
#2