Mortgage problems for the self-employed

Posted by: John Tozzi on September 02, 2008

Alt-A mortgages were designed for people with good credit who had trouble documenting their income — people like the self-employed. Not as risky as subprime but not quite prime either, Alt-As made some news recently because they’re part of what’s ailing Fannie Mae and Freddie Mac. About half of their combined $3.1 billion loss in the second quarter came from bad Alt-A loans.

Part of the problem is that many of these loans, like their riskier subprime cousins, went to people who never should have gotten them. Not self-employed, maybe not employed at all. That’s why some call them liar loans: no documentation of income or assets.

This Barron’s article sums it up nicely:

A substantial portion of Fannie's and Freddie's credit losses comes from $337 billion and $237 billion, respectively, of Alt-A mortgages that the agencies imprudently bought or guaranteed in recent years to boost their market share. These are mortgages for which little or no attempt was made to verify the borrowers' income or net worth. The principal balances were much higher than those of mortgages typically made to low-income borrowers. In short, Alt-A mortgages were a hallmark of real-estate speculation in the ex-urbs of Las Vegas or Los Angeles, not predatory lending to low-income folks in the inner cities.

So loans intended for self-employed home-buyers went instead to speculators. Now there's concern that Alt-As may lead another wave of defaults beyond the subprime crisis.

What does this have to do with small business owners? Entrepreneurs who took out Alt-A mortgages may be hit when their rates reset -- jeopardizing their homes at the same time the soft economy is squeezing their businesses. (The nightmare situation: rising mortgage payments and falling profit margins.) Sam Bornstein, a New Jersey accountant, first gave me a heads up about this a few weeks ago.

When I looked into this a little more, another concern surfaced. Small business owners with good credit (who can actually afford the homes they want to buy) may not be able to get Alt-A loans because so many people abused them as "liar loans," and nervous banks don't want to lend.

So we're still watching this unfold. But in the meantime, I'd like to hear from you. If you're self-employed and have an Alt-A loan, are you worried about making payments? Or if you're trying to buy a house, are you having trouble getting financing because you're self-employed? What other aspects to this story should we watch? Email me and let me know.

Reader Comments

brandon boyer

September 3, 2008 07:25 PM

I am currently trying to get a loan with debt to income of 32%. If the new loan would go through I would have a debt to income close to 47%. A good credit score of 750 and I am having a hard time getting banks willing to look at it. I have two that will but I know my tax returns won't have what they need. Frustrated when you are a responsible person.

CARLOS GASQUEZ

September 3, 2008 08:57 PM

ITIN LOANS WHERE MADE FOR ILLEGAL, IMIGRANTS ARE THIS TIPE OF LOANS ARE PERFOMONIG BETTER THAN ANY FHA LOAN OUTHERE.SOME OF THIS CUSTOMERS HAD NOT VERIFICATION OF INCOME AT ALL TO BE CONCIDER A GOOD CANDIDATE FOR THIS PRODUCT ,SAYING THAT ,THEY STILL PERFORM BETTER THAN FHA LOANS.
IF THEY CAN LEND MONEY FOR ILLEGAL INMIGRANTS ,WY THEY CAN'T LEND MONEY FOR SELF EMPLOYED HARD WORKING AMERICAN FORCE

Felipe Negron

September 4, 2008 08:53 PM

Carlos,

You ask why "they can't lend money for self employed hard working american force?" I'll tell you. Sure, most Americans may or may not work hard but the point of a loan is paying back. Most immigrants are people of their word. If they say they are going to do something they do it. For example, in Mexico you can purchase products/services for cash or credit. They take the most basic of information (basically your name and where you live) and grant you instant credit (for a premium rate of course due to their lenient approval criteria). Most Americans have an entitlement mentality. "Oh look at how great I am...I deserve this...give it to me." With no intent, much less financial ability to repay a loan. That's why the US is having such economic problems. Their egos are over inflated and they take on more than their means.

P. S. I was born in the US and I love this country and opportunities it has allowed me. I'm just calling a spade a spade.

Patrick

September 11, 2008 11:38 PM

This situation is absolutely madness. A year ago I was working for the "man" a large corporation and could qualify for the largest loan I wanted. Now I take over my family business have a credit score of 770 and can't even get someone to talk to me about a loan. These brokers have literally hung up on me as soon as they found out I am self employed. Someone has got do something to help out the truely good small business people.

Paul M

September 17, 2008 01:05 PM

Same thing here.

I have been self-employed for about 17 years. Even with a debt to income ratio of about 30-35% and a credit score of 702, no bank is willing to do anything without the evil tax forms. I refuse to let go of my deductions and throw away a big chunk of money to the IRS just to refinance my mortgage. Ridiculous! There has got to be another way... somewhere.

Anonymous Victim

October 13, 2008 09:40 PM

Self Employed, have two homes - with mortgages I always intended on refinancing if I stayed put. Well - I've stayed put, perfect credit, never a late payment - but trapped as they adjust and never able to get equity out again...well, not unless I no longer take any deductions and just pass everything through as highly taxable income. In business 15 years. At 2-300k/yr, I am livid! A sitting duck! I was only able to do stated income loans - showing enough asset to qualify - now I need returns?! I could barely qualify to rent an apartment with just returns! Totally unfair. Neither McCain nor Obama get it. Don't worry about raising and lowering fractions of a percent in taxes on small business owners - we know how taxes work. Instead we will lose 10's of thousands in taxes over a couple years just to buy a small home...and then go right back to doing business the right way. If there is no benefit to taking a risk and running your own business, and you can't reinvest into your growth because you are too busy paying taxes so you can qualify for a home - why bother? I'm trapped in my mortgage and my home. Why not just walk? The banks caused this by changing the rules in the middle of the game last year - thinking nobody would walk...well it backfired. And it will continue if they don't pull their heads out of their Palin.


AMERICAN

November 15, 2008 02:35 AM

first off we are all immagrants so get over it already. I to am self employed 22years worth and lost pretty much everthing to the housing collapse. bancruptsy has actually cost me more than what I lost and had emergency surgery one year after. So try going from 125k pryr to less than 20k and add medical bills. and to the tax collectors where is the little peoples bail out? oh their not invested in us, I forgot!!! so we don't need to look for any polytick to fix this problem same old lie different blood sucker. we are still the greatest nation on earth by gods grace only and by his grace we'll survive this one I pray and so should we all!

What to do?

February 19, 2009 10:18 PM

It looks like we are all in the same boat. I am frusrtated! My husband is self employed we have a 718 credit score, have had our home for 9 years with never a late payment! We are no trying to consolodate some debt and refinance and no one will touch it once they see tax returns. As a self employewd individual you take as many write off's as you can to avoid paying so much in taxes! That is my right. I have to state all my income, right..yet I have been told not to state all my expense...that doesn't seem fair. There has to be something that can help small business owners. My husband is not a doctor or a lawyer, just a custom carpenter trying to get by in these hard economic times when no one wants to spend money on fixing up homes. If we don't get the help we need soon, I am afraid there will be an adverse affect on my credit and managing my high interest debt. Please someone HELP!!!

Anamarie

April 2, 2009 11:53 AM

I've been working as a Project Manager (Government construction) for 20 years, with different private contractors. I was a W2 employee until 2008, the year that I went self-employed. I had $140,000 approx of W-2 income for the last 5yrs (well documented thru tax returns), and 2008 my adjusted net income is $140,000.00. My fico score is 766, I am trying to get a mortgage for my first home (only 239,000) in an area that homes are $390,000. This home is living conditions (no issue there)........the problem I'm having: self employed for 2008, even tough I had my corporation established in 2004, and for 3 years I was working as an employee for another company as well as, income from my corporation....yearly taxes for me have been approx 30,000 to the IRS for the last years!!! AND I am going thru hell trying to get a mrotgage!!!!

If I dont get this mortgage...this is it for me!!! no more taxes, I'll write off 99% of my coporation taxes, will take all the net money and move outside the US.....this is not fair...struggling and paying taxes for ALL my adult life since college, excelent credit.....not fair at all!!!

Martha

April 20, 2009 08:31 PM

My husband and myself have been self employed since 2002.For the last 4yrs we had our primary residents and a investment property. We sold our primary a year ago and now with the changes in the morgage industry we cannot get a loan. We have paid on time have a 750+ credit score and the mortgage companies have told me if i had a weekly pay stub and had just claimed bankrupcy and a 450 credit score it would be know problem getting a lone!!! This is bull crap, you pride your self with paying taxes and making payments on time and with your score it shows. People who are self employed work harder everyday and thinking harder trying to provide a living for there famlies and this is the thanks we get. The mortgage companies will help first time homebuyers with 8000.00 credit to purchase and if they do not have a down payment they can get grants. Now that seems risky to me. Congress wants the economy to pick up they should not discriminate against the self employed.

Nikki

April 24, 2009 11:55 AM

I've been self employed the last 5 years. My 07 and 08 returns show average net income of $82k/yr takehome with 570k gross. Between my husband an I we took home $268k in 2008. I'm a first time homebuyer, credit score 740 750 762. I have currently a 2% debt to income ratio. All i have are a few student loan payments - I have an 04 and 07 escalade paid off, and an 06 BMW M5 paid off. Also, I have $100k cash in the bank and I still cannot get a mortgage loan in the amount of $270k - The appraisal came back at $385k. WElls fargo OWNS the house as its a foreclosure, and I am applying through Wells fargo. I can't get a loan because my "self employment" income is not guarenteed.

You would think wells would take my $100k and run! Can anyone help?

Vinny

May 12, 2009 11:28 PM

LOL if Nikki cant get approved what chance do i have... guess i better find a house i can pay cash for and say F-U to the Banks

Lexie

May 19, 2009 06:38 PM

Vinny, I agree with you. My husband and I have waited for so long to purchase a house. We saved up enough money for downpayment and have $65,000+ in liquid assets. My husband's credit score is 816 and has never filed bankcruptcy, no late payments on any of our financial obligations...and no debt. We just wanted to buy our first home (a townhome in Maryland) and we were denied because of my husband's self-employed status. I could not use my income because my small business is less than 2 years old, and even still, we're both self-employed and whatever income I can add to my husband's income, they still wouldn't grant the loan. What's even unfair is, my husband's friend has had 2 bankruptcies and one foreclosure in the past with a credit score of 712, but he was able to acquire a loan!!! That's RIDICULOUS!! Now, he's under the water paying for their mortgage!

After reading the comments on here, it makes me feel better that we're definitely not alone. We were very upset yesterday, but we're moving on. We're just going to keep investing our money so it'll grow and keep saving until we can afford to purchase a house without financing. That's our plan now unless the government or the banks will change something about their lending rules.

Julie

June 19, 2009 02:55 PM

There is no such thing as an "equal opportunity lender". Until the day every loan applicant slaps down their tax returns for scrutinizing, or better yet, until they start giving 1099's the same face value as the beloved W-2 (which by the way shows 100% gross pay just the same as the 1099), well then we, the self-employed are screwed. Just because a person with a W-2 initially looks good on paper doesn't mean it's the whole financial picture for that borrower. For example, if you are W-2'd and also have income losses through another investment, or haven't paid your taxes for a couple of years without a judgement lien yet on record, or have additional failing business losses...YOU CAN SIMPLY QUALIFY with your W-2!! They never ask for tax returns for w-2 borrowers to see their true financial picture, only the self-employed must. If they give credit for 100% of the gross on a w-2, why not a 100% on a 1099 form as well? The tax forms AGI is NET income NOT GROSS income. Never has been fair. I was a lender myself for 10 years and never felt this was fair. Are they really that ignorant and stupid? Come on! They never report how many foreclosures are good ol' W-2 borrowers who have lost their jobs. This country has been slipping since 2001. Blaming the banking industry is a riot! What about the cost of war, the cost of oil/fuel?? People lost jobs 1st. Even most of those horrible "liars loans" would still be going strong with payments being made -on time- if the people had their jobs. Giving money to the banks and the houses too, only to find out they are sitting on the money and not loaning it out is a crime. Greedy people. I hope they hurt financially. They are too blind to see there are thousands, if not millions, of legitimate self-employed people available to purchase homes and help contribute to market correction. Total reform is needed if there is ever going to be an "equal opportunity lender"!! hahahaha what a crock!!!

Leslie

August 19, 2009 08:55 PM

Wow, I'm heartbroken,looking to relocate my business of 27 years into a home....looking to buy a small home under 130.000.00. Willing to put a down-payment of 20,000.00. Same problem, self-employed....BAD RISK....are you kidding me I have always payed bills on time....built up a nice business..over the years have employed many..!!! Is thier no help for us????? The small small business person.

LOL

September 15, 2009 08:50 AM

Sorry, but I am in the same boat as other self-employed businesses. I have a credit score of about 800, have bought and paid for; 4 homes in my life, several vehicles, an RV, and everything I have is paid off. I have been self-employed since 1984 with a good track record. I decided to take a break and try working for a Corp for one year and couldn’t take the extreme intimidation, so I went back to self-employment. That has been since 3/08. Well, that has “technically” been less than 2 years so lenders will not even consider a loan for another home. With us not being forced into a “cash only” basis, why do we even need banks anymore? Maybe time everyone boycotts banks until something is done….

Our problem, in my opinion, is our “leaders”. There is NO accountability in our government. Big surprise, huh? Isn’t it strange how our government STILL allows HUGE bonuses for those idots who guided our financial market into the ground. Why? Because or government is “in bed” with those idots. Some of our leaders have even been exposed, but only in a quick passing comment then it was quickly “swept under the rug”. Why again? Simple I think…. If a congressman or senator goes to a big CEO and tell them they have to stop, is it possible that those big CEOs tell the representative “No” and if he does anything, he will go down with him? Why is it only a small number of CEO “scape goats” are put before the public while the majority still conduct “business as usual”?

Listening to the news this morning, 9/15/09, a year after the Lehman Bros failure, there is still NO change in the financial structure that led to our crisis. Why I wonder? We need a “Hurricane” to sweep thru our government with HUGE continued exposure on ALL those responsible. Only then will there be hope for us (small business / self-employed) owners who make our economy move forward. Until then, Americans are not going to trust our government and we have no choice but to submit and “suck it up” while big CEO’s and government officials take our money to continue “feathering their nests” at our, and the economy’s, expense. We need to work harder and save more so we can be prepared to hand it over to “continue” bailing out those who refuse to loan us money….

Penny McCarthy

October 2, 2009 09:14 PM

We are in a similar situation trying to refinance an ARM with Wells Fargo. The credit card companies keep cutting our available credit because "other businesses in our area" are having problems therefore so are we. Are you kidding me? We work with the stupid banks on their foreclosure properties! That is a guaranteed income but because it is not W-2 it does not fit into the little black box. Wells told us we would have no problem refinancing into a fixted rate after one year. We're stil here and been denied by everyone we have talked to because of high backside ratios and self employment. This just sucks! So much for retirement!

Chris M

October 5, 2009 03:24 PM

Just went through the same frustration of each of you. Switched from W2 to 1099 a few weeks ago. I still work for the same company, just a technical change in the way we do things. I wanted more freedom, they wanted a lower employee count. Worked out better for both of us. I have a 780 credit score w/ income around 140k. My last 2 returns showed 71k and 104k income. I have over 110k of W2 income already for 2009, and will top out at over 140k. I was bringing over 70k to the closing, borrowing around 260. 9 out of 10 banks wouldn't even make the effort to run my credit. The few that did denied me, and the one that I finally found offered me a 3 year arm at 6.75% when you can obtain that at 3.75% making 60k less of W2 income (one loan officer actually suggested I take a 60k pay cut and go W2 for a while until I purchase a house).

If we self-employed are such a higher risk, why make it exponentially more difficult to maintain a loan?

And who in their right mind can say that a W2 employee is less riskier than a 1099 employee? In today's world, they are being let go left and right. At least I have a guarenteed contract for 6 months @ 70k. So even if I get fired, I can make my mortgage payments for the next year with no worries. Find me a W2 employee that can say that!

DocD

December 30, 2009 12:53 AM

In the same boat as you all. Wife and I are both doctors and own our own dental practice, plenty of assets/liquidity and still cannot get the smallest of mortgages. It is so ridiculous. We are going to have to do like others have said and just save up money to pay cash, or find a private lender or seller willing to carry paper.

rjsf

March 5, 2010 02:07 AM

Man oh man, I'm so glad I saw this post as it makes me feel soooo not alone.

I'm a physician with $90,000+ liquid asset right now PLUS a paid off Audi Q5 2009 SUV (probably worth 30 grand plus). FICO score last checked by US bank loan agent a month ago in the low 800s. My wife is unemplyed/homemaker. Only loan: $5000 credit card (hate to close it as it may affect credit score). Went from W-2 for 2 years to independent contractor 1099 last Aug 2009. Am (or was) a first time home buyer here in Vegas (sooo many cheap houses). Applied for mortage conventional and got preapproved by Wells F and US Bank, both conventional loan. Got a home bid accepted for $150 grand (I was going to put 25% down on a conventional loan by US Bank at 5% interest rate). OMG! and what I newbie I was to this loan process; found out about that frigin underwriting thingy about 2 years emplyment history required and you guessed it....loan denied (lucky to have gotten my $4000 earnest money before a contingeny on the REPA expired). Man, was my wife sooooo frustrated that I literally am angry about this because I wanted a house for her and my 3 y/o daughter with a nice backyard and like the frugal person I am (unlike certain colleagues of mine in the industry who have student loans or really just don't pay themselves a salary) I planned this ahead (including loking for a simple yet properly priced home here in Vegas) that I VOW NOT TO EVEN PUT MY UPCOMING 6 DIGIT MONEY WHICH IS ALL IN A SAVINGS ACCOUNT (never learned nor trusted investment programs and I'm an old school immigrant foreign trained doctor) IN ANY LARGE BANK other than a community bank! And I won't/will never fully pay off a house just to buy it right off the bat with my hard earned money until those non sensical rules baout underwriting are re-written by people with financial common sense.

Philip

March 12, 2010 04:15 AM

I'm glad? no sad, I guess to see I'm not in this boat alone. I too am self employed and am getting married in Nov. We are trying to buy a house to continue my home based business(I'm currently at my parents house). I have a 26% down payment on the price range we want ($100,000, average around here is about $200,000) But have already been turned down once because I don't have enough previous lines of credit. I only have one card that I buy the daily stuff with and pay it off at the end of the month. The banker actually said "You have perfect credit history, but I'm afraid we can't pre-approve you because you don't have enough credit cards".

From what I have seen so far, the big problem is the face to face trust is gone. The good old days of Joe the home repair guy looking to buy his 6th house, the same guy the banker knows by name is gone. Now what you have on paper is suppose to say it all, because the banker you're talking to really doesn't have a say in the matter.

soco

April 10, 2010 06:48 PM

I have been a real estate appraiser and investor for 15 years. I have to stay abreast of underwriting requirements for both appraising and investing. Unfortunately it has not been the banks who changed the rules on us. In the past I have been able to pick up investment properties with 100% financing.Now my bankers tell me that the regulations imposed by congress have placed such restrictions that they cannot approve even established customers without ridiculous requirements. Their business is out the window. This is after congress imposed regulations requiring the banks to make risky loans because, as per our illustious Barney Frank, everyone deserves decent housing. This is of course regardless of whether they can pay for it or not. CONGRESS IS THE REAL REASON FOR THE HOUSING CRASH NOT THE BANKS. What really urks me in the face of all this, is the housing grants yet being given to impoverished neighborhoods subsidizing their mortgages when we cant even get one. Someone on food stamps and welfare can get a new house with a government subsidy but my Sch C deductions keep me from qualifying for a mortgage with a perfect payment history.

Mad

April 23, 2010 07:49 AM

756 FICO, 130K after deductions on Schedule C. My wife has 784 Fico and no income. Debt to income including proposed new mortgage 24%. Still having a very difficult time obtaining mortgage because I have recently went back to being Self employed (18 months ago), so I only have one full year of self employment documented on my taxes. Ironically if I had not quit my W-2 job would be considered ideal. The reason I left the W-2 job was the company is nearly bankrupt. This is all because the government changed the underwriting guidelines. Does anyone think the government will do a better job with health care?

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About

What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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