Overcoming Mortgage Hurdles for the Self-Employed

You might be one of the 9 million people who have decided to become self-employed.  Being self-employed probably introduced taxes and health care coverage challenges.  You have finally settled into your new lifestyle and decided to apply for a mortgage.   Perhaps you cannot provide W2 or traditional predictions of incomes.  There are still a few ways to prepare for a smoother process when you apply for a mortgage.

Self-employed borrowers have a higher hurdle to overcome after stricter mortgage requirements went into effect in 2014.  These borrowers must now provide two years’ worth of tax returns.  The most common complaint from borrowers is that these returns are an unreliable record of their take-home pay.   There are many tax advantages of taking as many deductions as possible, but that does not necessary translate into an advantage when applying for a mortgage.

How can a self-employed borrower overcome this extra challenge?  Organize and prepare BEFORE you apply for a mortgage.  Buying a home is a big decision and it helps to have your taxes aligned with your home buying goals.  Looking ahead means self-employed borrowers should plan on taking fewer deductions the two years before buying a home to boost their overall income.  Yes, it might translate into increased taxes for a short time, but being able to qualify for a mortgage and a better interest rate will be worth the extra time strategizing with your accountant. Moreover, make sure you are showing an increase from year to year.  Lenders might ignore seasonal increases and decreases (landscapers for example) but they do not want to see a constant decline.  Borrowers should focus on their business appearing consistent and not volatile.

For those of you on a time constraint, you might have to consider alternative options. Do you have a spouse or family member whose income is documented by W2s willing to co-sign on the mortgage? You might not be able to qualify for a larger home based on only one income, but applying for a conventional loan would be easier. 

If you are saver, you also have an option of an unconventional loan.  For example, unconventional loans allow qualified borrowers to apply using the deposits recorded in their bank statements.  Just because a loan is unconventional does not mean you are necessarily paying more in interest.  There are numerous options for the self-employed borrower.   A mortgage broker can look at your personal situation and suggest the best option for a loan.  Look for the most up to date rates on www.lordmortgage.com

“Know Before You Owe” Mortgage Rules Coming Soon....

“TRID”  is the less intimidating name for TILA-RESPA Integrated Disclosure Rule which will go into effect October 1, 2015.   This change in the regulations means new forms for mortgage professionals, real estate agents and consumers.   “TILA” or Truth in Lending Act and “RESPA” or Real Estate Settlement Procedure Act of 1974 are the two forms lenders must share with the borrower shortly before or at the time of closing the loan.   The intention of the original Act was to make the process less confusing, but the need enact a new law (TRID) would indicate that wasn’t always the case for consumers  TRID is a chance to correct past mistakes.

Everyone is aware that there are more stringent lending standards in place since 2008 to help consumers not get in over their head when applying for a mortgage.  My first impression of TRID is that it is meant to S-L-O-W down the process.   Certain construction loans, raw land, and “bridge” loans will be subject to TRID, but were previously exempt from required waiting periods from RESPA.  (Bridge loans are used to finance the purchase of a new home using funds from an existing home sale) Expect a longer mortgage cycle for these types of loan after August 1st. 

What exactly is slowing down the loan process? At the start of the mortgage application, there are new forms, such as the Loan Estimate form which will be provided to borrowers no later than three business days after they submit a loan application.   Clearer language and design will make it easier for the borrower to read and truly understand all the costs of the loan. In theory, this requirement will give borrowers more time to examine the costs of the transaction and confirm they truly want to move ahead with the transaction.  In addition to paperwork, the last update to the law (RESPA and TILA) required lenders to also provide applicants with a list of certified homeownership counselors if they are proceeding with a high-cost mortgage.  Realtors will need to wait a longer time period to hear back if a loan was approved for their buyers because of this new waiting period.

Also under the new rules, the borrower must receive the Closing Disclosure no later than three days prior to the date the note is signed aka “closing”.  In the past, the borrower might receive this paperwork the day prior or even the morning of settlement.  TRID will in essence, push the rush for documents from the day prior to closing to three days prior. The rush will be on the folks involved with the closing, not the borrower.   Realtors will have to be familiar with these forms which are replacing HUD-1 and Truth in Lending Disclosures. Working closely with a Mortgage Broker you trust will make sure your closing go smoothly and all required paperwork is sent at the required time interval.