You’d think a doctor with her own private practice or a small business owner with a six-figure income would have no problem getting a mortgage loan. But think again. Increasingly, self-employed professionals — some of the smartest and most successful people in the U.S. — are being turned down on their mortgage loans.
While there are no hard numbers on how many self-employed professionals are being denied mortgage loans, The Wall Street Journal says that changes in the ways that lenders handle mortgage loans — specifically underwriting criteria — have resulted in an increase in the number of self-employed being rejected for home loans.
The Journal lists “doctors, lawyers, accountants and small business owners” among the new group of self-employed borrowers who find it increasingly difficult to get a mortgage loan.
The Journal cites the case of Hubert Noguera, a 38-year-old small business owner in Saratoga, Calif. Noguera “can't get approved for a loan, even though he has a strong 800 credit score and is prepared to make a 40% down payment on a house near San Francisco in the $800,000-to-$900,000 range.” Noguera told The Journal he “has assets worth three times the $500,000 loan he's requesting and is in the process of selling his share of a recently inherited residence in Saratoga, Calif., worth $1.1 million.”
Yet Noguera, like a lot of self-employed professionals, still can’t get a home loan. The reason? New mortgage lending rules that place a priority on “full documentation” work against self-employed borrowers. Since self-employed workers don’t have W-2 forms — the typical document lenders want to see before approving a loan — they have to depend on their tax returns to prove their income. But as The Journal points out, income from tax returns is typically understated as self-employed professionals are more likely to take business tax deductions. It’s a “good news, bad news” scenario. Self-employed professionals do get some great tax deductions, but when they apply for a loan, their tax returns will show they earn less money than they might actually earn.
Banks, which have been badly burned by “liar loans” where borrowers exaggerate their incomes, aren’t as likely to take a self-employed borrowers’ word that they make a specified amount of money. And that’s taking a toll on seemingly successful self-employed Americans who increasingly find themselves locked out of the mortgage market.
"If the market stays as it is, we've frozen thousands and thousands of good borrowers out of the mortgage market," Peter Ogilvie, past president of the California Association of Mortgage Brokers tells The Journal. "People who've demonstrated they can pay their bills cannot get a mortgage — and that's people who have homes."
The best way out for self-employed mortgage borrowers? Keep your credit rating high and be prepared to show you have liquid assets. A larger down payment than the traditional 20% won’t hurt, either.