Mortgages for Self Employed Clearly Explained
by Monica from Ohio
Ask Kate to explain mortgages for self-employed, stated income mortgages, and no doc mortgage loans: Hi Kate, My husband and I are self-employed homeowners and have good credit. But because of the way we file our income taxes, it looks as if our income is too low and our debt-to-income ratio is too high.
I am currently paying on a loan with ridiculously high interest and have tried to get it refinanced, or tried to put it in with our mortgage, or even just tried to get the bank to buy the loan.
I do not want to borrow any money, so I don't understand why this is such a problem. I merely want to have it refinanced for a lower rate. But every time it comes down to our debt-to-income ratio.
We have a S-corp, and by the time we take our exemptions out, we pay taxes on what is left. They use this amount as our income, when in fact it is not, but that's what they do.
What can I do about this? There has to be more people out there in this situation. Who can I get to refinance this for me?
Kate Answers: Mortgages for Self Employed Clearly Explained
Yes, you can trust that other self-employed homeowners share your concerns.
In fact for years, the self-employed have felt the lending system treats them like second class citizens.
It doesn't help that banks keep telling themselves that tax returns adequately reflect a small business owner's true income.
So while we wait for the bank's attitude to catch up with reality, here is a behind the scene's look at mortgages for the self-employed.
1. Use a mortgage originator who understands the nuts and bolts of tax returns.
This is a must. Loan representatives must have enough knowledge to fight on your behalf. Unless they can analyze tax returns like a pro, how can they help you?
You are not looking for an application taker. You need an effective advocate.
2. Choose a lender with a track record of approving mortgages for the self-employed.
This can be a bit tricky because a bank is never going to admit its paranoia of self-employment. But here's the thing. You can take advantage of the network between fellow small business owners.
Ask your self-employed friends which lenders approved their mortgages. Specifically get the names of those loan representatives who assisted them.
3. Offer copies of at least two years of personal and corporate tax returns.
All pages. All schedules. All attachments. Legible copies with the content sitting squarely on the page. You want to make it easy on the underwriter's eyes and reduce frustration. Why not!
4. Document assets to offset debt-to-income ratios.
Bring along verification of every bank account, stocks, bonds, pensions, 401ks... Can you think of other accounts you have? Verify each for a minimum of two months. Again, all pages and legible copies.
5. Create a written letter of explanation for anything out of the ordinary.
Don't make your mortgage banker guess why last year's income went down. Head off doubt and suspicion at the pass. (Keep in mind the bank's self-employed paranoia and predisposed tendency to react with a no... ) Be an open book with a positive attitude.
A good example, let's say you had a medical bankruptcy 6 years ago. You could explain the events leading up to the BK. To show you have taken measures to prevent another medical bankruptcy, attach a copy of your insurance card.
6. Shop for stated income mortgages if your tax returns are too cumbersome.
Stated income mortgages do not document income. You won't need to lug reams of paper to the bank. No tax returns! No profit and loss statements! You merely state your income on the home loan application.
Because your CPA may be called upon to verify proof of employment, give your accountant a head's up.
Verifying assets becomes even more important. A strong credit history too. Even so, there may not be an abundance of stated income mortgage programs from which to choose. Tracking one down may require persistence.
But you are self-employed and applying elbow grease is not unfamiliar to you.
7. No doc mortgage loans, one step past stated income mortgages.
To varying degrees, no doc mortgage loans require very little in the way of income, employment, and even bank account information. Sounds heavenly?
Know this. The less that is documented, the more the mortgage is going to cost, either in required down payment, interest rates or points, fees, and mortgage closing costs. Be aware of prepayment penalties also.
For more help, go to: How to Reduce Mortgage Refinancing Costs
. This will help home buyers too.
It is worth noting, no doc mortgage loans still have an appetite for paperwork. So while you won't be asked for traditional documents, you might discover miscellaneous requests. Try to keep a sense of humor. These files can get huge.
8. What about no credit check mortgages?
From time to time, claims of no credit check mortgages circulate the web. I wouldn't spin my wheels looking for this program. You can imagine the excessive interest rates, points, fees, mortgage closing costs, and prepayment penalties.
9. Remember seller financed mortgages for self-employed home buyers.
For self-employed home buyers, there are also seller financed mortgages to consider. So if traditional mortgage lending fails, think about this option. For more information, go to What is Seller Financing
Good luck and best wishes,
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