Thursday, April 17, 2008

Analyzing Self-Employed Borrowers

The great American Dream, outside of owning your own home, is probably running your own least for some. The freedom that comes with watching something grow, setting your own hours, working for your self and working hard is in itself satisfying. But with anything there are positives and negatives and with the many positives comes a negative in the underwriting world of lenders.

Fact of the Times = If it isn't on paper then it can't be counted.

The lending world has reverted back to its pre "lend money to anyone" phase. Investors are being selective in the loans they want to purchase and in turn underwriters are having to explain and underwrite files with no holes. The days of Stated Income/Stated Asset for a wage earner are gone and it will be a long time before those programs return. The only harm is that the SISA program for Self-employed or 1099 borrowers with excellent credit has dried up as well. This is harmful for two reasons...

1) Self-Employed/Small Business Owners account for 18.6 million in the U.S. (See link. --Statistic from 2003, however one could assume the numbers have and will continue to increase)

2) Self-Employed borrowers accounted for 44% of all loans closed in 2006.

This means that as the numbers of self-employed borrowers increases, those persons are going to be in need of mortgages. If they can't get a mortgage due to the structure of their business and taxes, it is going to be difficult for these borrowers to qualify for homes and "move-up" in the housing market. If they can't move up, then they won't sell their home and the market will continue at a stand still. It will be important to begin seeing the programs return for Stated Income Self Employed borrowers in order to refinance them and get them into new homes.

The truth is there are many different variables affecting the current market and the above is just a piece of the puzzle. Self-employed borrowers can take the following steps to prepare their finances in order to present a full, clean documentation file to a lender:

1) Showing two or more years of Self-Employment history.

2) Owning 25% or more of the business

3) A strong two year average of income.

4) No significant decline in your busines income.

5) Lenders may require; Business License, Personal Financial/Corporate Financial Statement, 2 Years Tax Returns (personal and business), etc.

It is important to have your financial information in order when applying for a mortgage to insure that they underwriter can get complete information and file on you. It is possible to get a mortgage, it just may be a bit more of an exhaustive process.

See article "Chasm Grows between Home Lenders and Self Employed." for related information.

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