Mortgage Financing for the Self-Employed

Mortgage Financing for the Self-Employed

Mortgage rates have fallen and self-employed individuals have been applying for mortgage financing for their homes in order to restructure their debt. Business owners have discovered that the requirements for mortgage financing have tightened up and they must have hard firm evidence of income.

Income Verification and Valuations are a Stumbling Block.

2007 and 2008 were tough years for the self-employed but the risk that surfaced from the industry has required income verification rather than stated income or no income verifiction products. "Commonly in the industry debt repayment must not exceed 33-42% of total income per month in order to qualify for a loan." says Arnie Oxman of The Equity Mortgage Group Company, Inc. in an interview with Suite101.com. "But the issue is only partly income verification," says Arnie. "You also have valuations that have fallen causing some individuals to be upside down on their loans which compounds the problem." A lot of these loans are Sub-Prime or Alternative A loans which were no verification or stated income loans based in large part on overly valued homes that have lost those values because of market conditions. That coupled with the loss of income has ended in foreclosure.

Tax Returns Used to Verify Income.

Herein lies the reason for the hard and fast rule of tax returns to verify income. Since a lot of self employed individuals as a group have defaulted on their loans the banks have had to verify everything given on an application regardless of credit rating and loan payments. Someone can have a perfect credit rating and never be late on a loan payment but still must verify their income to qualify. This protects the government agency buying the loan so they require it from banks.

Why Can’t the Self-Employed Tap Into Their Equity?

On the surface this all seems unfair for the self-employed as they may already own homes that had a substantial amount of equity, thus reducing the banks overall risk. Problems can arise with credit markets tightening up; fewer homes are sold, thus reducing the value of a home. These drops in appraised values have led to a substantial slowing of the economy, creating a problem for business owners who want to tap into their equity as a source of working capital. But with drops in values, the equity is no longer available. This may prevent the self-employed business owner from expanding, therefore not creating new job opportunities.

Don’t Banks Have a Mortgage Product for the Self-Employed?

The banks at one time provided a mortgage designed for self-employed individuals who have trouble with verification of income (with higher rates) but in recent years some real estate speculators used the loan and then would default as times got hard and good renters were hard to find. The government agencies like Fannie Mae are now overwhelmed with these types of bad loans.

What About the Jobs They Provide?

It will be a few years before self-employed individuals can gain access back into the equity markets. This could further deepen the recession because many new jobs come from small businesses owned by the self-employed. If they have their credit tied up and nowhere to turn except credit cards, then they will be less likely to expand and increase employment. A big challenge for the Obama Administration is trying to open those traditional pipelines of recovery to add jobs to the economy that is badly in need of liquidity.

What About Those With Long Term Banking Relationships?

The self employed are creative and will find ways to do business to some degree but the heavy loss of credit could pretty well mean the end for those on the edge and the newly-formed. Those with longevity and good banking relations might find themselves qualifying for some special type of commercial loan. Wherever someone is in the self-employment cycle, mortgage financing will be hard to come by for a few years because of income verification.

Where is the Federal Government?

The Obama Administration, realizing that small business creates many new jobs, is rolling out the Homeowners Affordability and Stability Plan. This is a refinance program that homeowners are eligible for if they have a good standing payment history on an existing loan owned by Fannie Mae or Freddie Mac but are unable to refinance because their homes have lost value.
The program will keep homeowners from foreclosure by reducing interest rates and cutting back on the principal to get homeowners to achieve a 31% debt-to-income ratio. This will be a monumental help for people to stay in their homes until the economic recovery is complete. When will the economic recovery be complete ? When jobs come back.
There is still lots to be done and economic recoveries can be slow but this could be the one spark that gives small business breathing room enough to boost the job market. Lets hope so!