What challenges does a self-employed borrower face for a mortgage?
For nearly seven in ten people, being self-employed is the ultimate dream for their working life. Currently, around 30% of Americans actually work for themselves with less than 10% making a go of it full-time. Although it’s an achievement worthy of celebrating, certain challenges come up when you strike out on your own rather than working for an employer.
Certainly, long hours are an expectation to establish a business or become a successful freelancer or contractor. But financially, obtaining credit can be much more difficult for someone who files a 1099 rather than receiving a W-2. Nowhere is that more evident than with mortgages.
What obstacles are in the way of a self-employed borrower in their quest for a mortgage? Here are a handful of concerns.
Hard to qualify with lower declared income
A perk for self-employed borrowers is an ability to lower declared income due to write-offs. Often done quite successfully, it lowers the amount of income tax to pay. Unfortunately, most types of mortgages use taxable income as a measuring stick for qualifying. Regardless of what you actually take home, a mortgage lender sees documents that are substantially less, and that almost always lowers the mortgage amount you can qualify for.
Self-employment often looks unstable
When you collect a normal paycheck, it’s usually the same from one pay period to the next. For most self-employed borrowers, income drawn varies from one month to the next. It may even be a lump-sum payment or dividend at year-end.
A typical lender is looking for documentation that shows consistent income month after month. When that isn’t shown, it appears that the borrower’s income is unstable, even if it’s backed up by an impeccable credit score and history. Instability when buying a home doesn’t bode well, and a rejection is often in the cards.
Documentation may not be accepted
Many of the standard lenders require non-negotiable documentation when applying for a mortgage. That usually includes a W-2, two to three years of tax returns, and paystubs, as well as proof that you can pay the required fees and down payment.
That can be a serious problem when someone who’s self-employed is applying. While they have bank statements and tax returns, W-2s and pay stubs usually aren’t part of their documentation.
High down payment requirements
Again, based on the risk assessment by banks and credit unions, self-employed applicants often are restricted on the loan amount and need to put up more of the home price as a down payment. The down payment amount can be as high as 30% in some cases, and it’s possible that private mortgage insurance is still required. In some instances, the number of years on the loan term can be limited to 15 years, making it much harder to afford the monthly mortgage payment.
MBANC offers 1099-only mortgages for self-employed borrowers
Banks make you jump through hoops to borrow their money on real estate. MBANC makes it easy for borrowers with non-traditional income to get approved quickly for the mortgage you deserve, even as a freelancer or self-employed business owner. We can secure competitive terms and rates for the life of the loan, helping you focus on your family and business instead.