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Tuesday, November 20, 2007
Mortgage Problems for the Self-Employed
Much of the business force in the United States is self-employed. Despite this fact, lenders have a bear of a time coming up with ways to handle such people.
Home loan lenders like things in a nice, orderly box. They dont like variations. They want certain numbers to appear on their applications. They then want to take these numbers and run them through their nice computer program, which then kicks out a yes or no answer on whether the loan should be made. Self-employed borrowers do not fit within this nice, neat box scenario.
Some fabulously successful self-employed people have major problems getting home loans. How can this be? Well, the problem is they do not look so successful on their tax returns. This is due to the fact there is an inherent conflict involved between ones tax return and ones mortgage application.
As we all know, the goal with taxes is to reduce our taxable income. For the self-employed person, this involves deducting everything including the kitchen sink. Obviously, the deductions need to be and should be legal. The goal, however, is to show as little taxable income at the end of the painful process of filling out ones tax return. This sounds great, but leads to a problem when applying for a loan.
One of the biggest factors in borrowing money for real estate is your income. Specifically, how much do you make in relation to what you want to borrow? Well, most lenders will check your tax return to make the determination. Now you see the problem. The income you minimized for tax purposes kills your prospects for getting a loan! It is the veritable catch-22.
So, do you have any options for getting around this? There are a couple of approaches. The first is to get the lender to eliminate paper deductions when calculating your income. You can deduct certain things that dont really come out of your pocket, such as depreciation. If the lender will set aside these deductions, your income will look better.
The second approach is to put more down on the purchase. If you can get to a point where you are putting 25 to 30 percent down, a lender will often disregard your income issues. Why? Well, you must have income or you wouldnt be able to come up with the hefty down payment!
Being self-employed is great until it comes time to apply for a loan. Then, it can be a real bear. Try to work creatively with your lender to find a solution that works for both of you.
Read more real estate articles for free at FSBOAmerica.org
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