In some ways, it’s a great time to buy a house. Rates are low—downward of 4.5 percent; inventory is high and sellers can be advantageously motivated. It’s certainly a buyer’s market, but only if you work for someone other than yourself.
Although the lending industry has issued new and stricter standards for all mortgage-seeking individuals, self-employed people and small business owners find themselves especially hung up with regulations, paperwork and rejections.
And in Charlottesville, which according to 2008 Census numbers has more than 15,000 firms identifying themselves as “self-employed individuals operating very small unincorporated businesses,” the effect could be considerable.
Before the housing bubble burst, these borrowers could qualify and obtain a mortgage with nothing more than an estimated annual income and no need for pages upon pages of documentation.
These days, stated-income loans—a mortgage supported solely by the borrower’s word on estimated income with no pay stub, W-2 or tax returns verification—are no more. So are no-income, no-assets loans. These types of loans were originally issued by some of the biggest lenders in the nation (Ameriquest and Countrywide) and are now called “liar loans” for the number of borrowers who dissembled about their estimated incomes.
Even the definition of an excellent credit score has changed over the last several years. “In the past, a 580 credit score would be sufficient for a subprime loan,” says Lee McAllister of Fulton Mortgage Company on Hydraulic Road. “Today, for the best pricing, you need a 740 credit score.”
Nowadays, unless the borrower has a documented two years of tax returns—where she can show that although self-employed, she makes enough to support a mortgage payment—a good credit score, and money for a down payment, no banks will give her a loan. Even stellar credentials won’t make the cut. Say you have an 800 credit score, more than 20 percent liquidity and a six-figure salary, but you lack those two-year tax returns: The banks won’t even take your application. (Occasionally, the banks can get by with 12 to 18 months of documented income for qualifying).
“When I first got into the business in 1983, [a self-employed borrower] had to have two years of tax returns and that had always been the rule until the 1990s,” says Bill Hamrick, vice president and branch manager of C&F Mortgage Corporation off Rio Road.
“All of a sudden, the self-employed person didn’t have to do that anymore.”
Now, although McAllister says the two-year tax returns requirement for the self-employed has always been part of the process, what changed—thus making it harder for self-employed borrowers to pre-qualify or even find a loan—is the amount of requisite documentation.
“Bank and investment account statements are required to verify any cash used for closing and reserves,” she says. “Any inconsistencies in income, source of funds for large deposits to bank accounts and credit inquiry explanations are examples of additional required documentation.”
And the cost of all the extra paperwork goes right back to you.
But is there a solution to this madness? Yes and no. The good news is that you can find a co-signer. The bad news is that he or she must have impeccable finances.
“[The co-signer] can be your mother, father, uncle, brother, sister who has really good income, whose credit score is not going to tear you down, who will actually sign on a loan,” says Hamrick.
“And it’s not just that they have good credit and good income, they’ve got to have enough income to support whatever they own and your mortgage,” says C&F’s Dicky Owens.
How about creative financing? Sure, says Hamrick. “There are some monies to be found for [self-employed borrowers] if you put a large down payment.” The catch? “Your interest rates can be double digit.”