Dallas Fort Worth Area Homes and Real Estate

I don't have to say that mortgages have changed dramatically over the last three years.  Anyone that hasn't been living under a rock knows that.  But the most significant change that many people don't realize is that stated income loans have all but vanished (aside from some hard money loans available with astronomical points, fees and rates). 

Up until just recently, there were still some reduced documentation loans available with as little as 10% down, but those are completely gone from the wholesale lending channels (brokers), and i'm not familiar with any retail channels that offer them either.  Basically, lenders would allow borrowers to "state" how much income they made without actually calculating their true income from tax returns.  Usually if the income was in line with the occupation, the loan was generally approved.  While stated income loans were initially created as a way for people to reduce the paperwork load that comes with getting a mortgage, many buyers and lenders abused these programs.  The end result is a massive wave of loan defaults on these loan types that resulted in the elimination of these programs.

So what about self-employed borrowers?  What options do they have?

Before I delve deeper into this issue, I want to clear up one misconception that I hear very often: Self Employed borrowers can't get mortgages anymore.  That's a very general statement that is not true, but self employed borrowers that WRITE OFF A SIGNIFICANT AMOUNT OF THEIR INCOME or who DO NOT REPORT ENOUGH INCOME may not qualify.  Lenders require buyers to have a certain debt-to-income ratio in order to qualify for a mortgage.  That debt-to-income ratio is calculated from the net income, not the gross.  There are some items that can be added back into this calculation (namely DEPRECIATION), but it all depends on the situation.  I recently had a borrower who wrote off a significant amount of income because of a per-diem travel allowance that he deducted because he was traveling to Dallas for work and had to stay in a hotel.  But since he was moving to Dallas, it made sense that he would no longer take that deduction AFTER the move, so the underwriter allowed that deduction to be omitted.  Without that omission, he would never have been able to get a loan. 

Again, every situation is different.  Don't assume anything without calling me directly and discussing your individual situation.

As far as their loan options, self-employed borrowers generally must prove two years of self-employment income in order to be considered for a loan.  Other than that, the qualifications are basically the same as they are for wage earners.  Lenders don't discriminate against self-employed borrowers, they just require proof of income now.   

Regarding income and self-employed deductions, I've seen many people who obviously use rather "liberal" tax accounting methods and write off most or all of their income.  Many of those borrowers didn't worry about qualifying for a loan since stated income loans were readily available over the last several years.  But now, borrowers who have too many write offs may be left with no other option but to borrow money at much higher interest rates.  And furthermore, the IRS is well known for stepping up enforcement during times of economic hardship.  With budget deficits projected to be in the Trillions of dollars for the forseeable future, tax audits are bound to increase.  The IRS has already announced they will be stepping up tax audits in the coming years.   Just google "IRS audits increasing" and you'll see what I'm talking about.  If you're self-employed and use "liberal" tax accounting, you may want to reconsider for these reasons. 

If you're self employed and plan on buying or refinancing a home in the next few years, give me a call so we can discuss your options.