When the economy takes a tumble, the worst hit is usually the realty business. You may think self employed people have little to worry. However, nothing can be farther than the truth. In fact, self employed find themselves on islands or easily sidelined by mainstream economy enthusiasts. Approaching mortgage for self employed bad credit is special needing extra care.
Self-Employed and Cannot Qualify for a Mortgage?
Usually the self employed borrowers find themselves at receiving end of the negative impacts of an economic downturn. The recent mortgage crises spelt doom for many self-employed homeowners. Self-employed home buyers could no longer even think of buying a home and had to postpone their plans. Looks like they will have to wait longer than expected because the mortgage rates are sluggish at best. Even though mortgage rates are at historic lows nationwide, self-employed borrowers are finding it difficult to get adequate funds to purchase a dream home. The culprit is, as always, bad credit. Applying for mortgage for self-employed bad credit means keeping your fingers crossed until closing time. Anything can go wrong!
Let us try to understand in short what happened; who was to blame, how it is being shifted and more importantly what can we do to adapt new guidelines for lending standards.
What Happened (especially in case of self-employed)?
Mortgage underwriters use adjusted gross income (AGI) to qualify self-employed borrowers. A large portion of the self-employed can and do legally write off most of their income so their actual income for tax returns remains low. This being the case, self-employed homebuyers cannot use full income figures to qualify. The best mortgages for self employed lenders offered programs like stated income, stated asset (SISA), and no income, no asset loan (NINA) programs. Lenders did not have much to worry about since self-employed homebuyers had good credit and good equity.
In addition to SISA and NINA programs, lenders included W-2 wage earners, sub-par credit worthy borrowers, borrowers with little equity, and un-proven first-time home buyers. You can guess what happened.
Home loans for self-employed people started under performing and defaults started piling up.
Who was to Blame?
Misguided policies led to breaking down of Wall Street and big bank guideline laxities caused an economic meltdown in the realty business. As a result, credit-worthy self-employed borrowers had to endure the most of economic hardships. Responsible persons neglected to limit stated income amounts and did not warn homebuyers of the consequences.
Our recent economic crises of the new millennium, involving the realty industry is a classic case of “blame-the-broker” theme. A ploy of politicians, banks and press in the months following any meltdown.
The long and short of this disorder is that credit-worthy self-employed borrowers are still being left out in the cold.
Self-employed may complain all they want: paid my bills on time, have perfect credit, punishment for being self-employed and plain and simple unfair. It makes little difference…
Paying the least amount of taxes has started working against self-employed borrowers. At least as far as home mortgage loans are concerned. It is the duty of CPAs to inform self employed how their taxes affect borrowing abilities.
Self-employed should work with CPAs adjusting tax deductions to improve AGI. Self-employed borrowers should stop writing-off so much and pay more taxes to qualify for remortgage for self employed.