Way back in the olden days, four or five years ago, you didn’t even need a job to get a mortgage. Lenders were happy to accommodate applicants who simply claimed to have adequate resources to make payments. Verification wasn’t necessary.
The days of “no documentation,” or “liar” loans are long gone. That may be a good thing for the economy and financial markets. But tightening credit standards have all but frozen out many would-be borrowers perfectly capable of making payments: the self-employed.
No W-2 form from an employer, no mortgage. At least that’s the way it seems. Lenders, already stung by soaring delinquencies and foreclosures, worry that the self-employed applicant’s income is too shaky and hard to verify to assure on-time payments.
Among the problems: Many self-employed people take large business-related deductions to reduce income tax. That comes back to bite them when they show too little income to qualify for a loan.
The government-backed mortgage firms Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) own or back most of the mortgages being written today, and they have toughened lending standards.
It’s not impossible for a self-employed person to get a mortgage, but it’s likely going to take a lot of shopping around. There are a number of things you can do to improve your chances:
- Show a verifiable income. These days, that means producing income tax returns for two or three years.
- Improve your credit score. Make sure there are no mistakes in your credit report by contacting the three agencies.
- Show a good record of payments on a previous mortgage. If your record is good, try getting a new loan from your current lender.
- Document your assets. Furnish records of stocks, bonds, mutual funds or other investments to show you have resources to make payments even if your business goes through a bad patch.
- Make a big down payment. The less you borrow relative to the property’s sales price the easier it will be to sell the property for enough to cover the loan if your income falls. Paying 20% or more down will also free you of the requirement to carry private mortgage insurance.
- Buy a cheaper home. Similarly, the smaller your debt related to your income and assets, the safer the loan looks to the lender. A cheaper home can actually be a better investment.
- Clear away other debt. Pay off your credit card bills and car loans, to reduce demand on your income. The Credit Card Pay Off Calculator will show the best strategy.
- Buy a single-family home. Lenders currently consider condos riskier.
- Find a co-signer. With a friend or family member co-signing the loan, you look a lot less risky to your lender. Remember that although you may be planning to shoulder the mortgage payment and other home expenses, your cosigner will be on the hook if you fall behind.
If all else fails, renting is not a bad alternative. The housing market does appear to be offering bargains, but there’s no guarantee that prices will recover in the next two or three years. Rent, and use that time to improve your credit and build assets and show a healthy income on your tax returns, and you’ll be ready for a mortgage when the market perks up.