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Mortgages For Self-Employed Become More Common

January 24, 2014

If you're self-employed and need a mortgage, you're going to find that a lot of lenders want your business. Despite Internet rumors to the contrary, well-prepared applicants who are self-employed, freelancers and "nonstaff" can get readily get real estate financing with the same mortgage rates as corporate employees.

Self-employment on the Rise

If you've looked at the workplace recently. it sure isn't anything that would be recognized by parents and grandparents. China has now replaced the United States as the world's largest manufacturing country and fewer and fewer of us are farmers.

We have evolved into what is now described as a "service" economy. Full-time jobs are becoming a rarity and jobs with benefits are even more scarce. By one estimate 40 percent of all employees will be "contingent" workers by the year 2020 -- that's just six years from now.

The value of a college degree has plainly changed. A new report from the Federal Reserve Bank of New York says "the percentage who are unemployed or 'underemployed' -- working in a job that typically does not require a bachelor’s degree -- has risen, particularly since the 2001 recession. Moreover, the quality of the jobs held by the underemployed has declined, with today’s recent graduates increasingly accepting low-wage jobs or working part-time."

Self-employment and Mortgages

The very fact that more and more of us are self-employed means that lenders have had to adjust to marketplace realities. Any lender who accepts loan applications from only W-2 employees is instantly missing a large share of the marketplace. In a competitive world, that doesn't make a lot of sense. The better alternative is to welcome the self-employed.

The change in mortgage underwriting standards required under Wall Street Reform should not frighten anyone who is self-employed. Indeed, freelancers and others will likely find a very receptive marketplace. That's because the new application standards are simply a re-hash of what lenders have traditionally sought from borrowers and have been requiring for years in the wake of the foreclosure crisis.

Until the mortgage meltdown which featured toxic loan products, little down and allegedly "no doc" mortgage applications, no lender with any sense would look at a mortgage application that did not plainly establish the ability of the borrower to repay the debt. In fact, during the mortgage meltdown many lenders as well as the FHA and VA maintained traditional standards.

So yup, we're back to the good old days of mortgage lending. And the new days too.

Rules for Self-employed Borrowers

For those who are self-employed the new standards are a breeze. Really. You already have everything you need in a file near your desk.

According to the Consumer Financial Protection Bureau, "under the new rules, lenders do have to verify that consumers can afford to repay their mortgage -- that’s the whole point. Lenders will make that determination by looking at documents such as payroll stubs, tax returns, student loan statements, credit history, and other financial information. These documents help lenders weigh borrowers’ debt against the income and assets available to pay off the debt. Without this information, lenders cannot make an accurate assessment of affordability, and borrowers could wind up in over their heads."

If you're self-employed, lenders will surely ask for your last two or three tax returns and bank statements. They'll want leases and they'll want to see financial accounts. They'll want to see cash and they'll want to know where it came from. They'll "add back" some things you deduct for tax purposes such as real estate depreciation because it's an accounting expense and not an out-of-pocket cost.

Lenders will also look at your credit scores and credit reports. None of this is a big deal -- you'd do the same if someone asked you for a few hundred thousand dollars.

Any lender will gleefully provide a list of needed paperwork. Think of it as the first half of a football game -- once you've gotten your papers together you've gone a long way but there's more to go. From what the lender collects there may be a need for additional documentation. No problem. Just give the lender the appropriate paperwork and the mortgage application will likely fly through the system.

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