Becoming Lendable in Today’s Mortgage-Market For Self-Employed Borrowers –

The underwriting guidelines for mortgages have changed over the last couple of years. The biggest change is the elimination of stated-income loans. These types of mortgages are gone and they are not coming back any time soon and most likely never.

Today’s lenders want “Proof” that you can afford to make your mortgage payment. For those people that are employed by someone or are considered a wage-earner it’s pretty easy to prove your income with paycheck stubs and W-2s.

On the other hand, for those self-employed borrowers it comes down to one thing – tax returns. In the past, self-employed borrowers used the stated-income loans to qualify for a mortgage. These types of loans were for the person that their tax returns did not reflect their true ability to service their mortgage.

Now that these types of mortgages are a thing of the past self-employed borrowers have to analyze their current and future lending needs and balance that against how many deductions they take on their tax return in order to become lendable.

A lot of self-employed borrowers expense as much as possible to reduce their tax burden. Unfortunately when you expense as much as possible it reduces your Adjusted Gross Income – the amount used by underwriters to qualify your income for the mortgage.

If you expense too much you qualify for less and if you don’t take legitimate expenses you pay additional income tax. That’s why we are advising self-employed borrowers to get together with their CPA and/or tax advisor to make sure they are not expensing too much if they’ll need the additional income to qualify for the mortgage, particularly for borrowers seeking jumbo mortgages or super-jumbo loans.

In addition, you need to get your mortgage advisor involved so that they can help you “back into the amount needed” for qualifying purposes. They can let you know which deductions are allowed to be added back in as income by the current underwriting guidelines. In addition, they may have investors that will look at the global financial picture and cash-flow of borrowers and not base their underwriting decision solely on debt to income ratios.

Like almost everything in life it’s about tradeoffs paying a little more in taxes to get the loan you need versus staying in your current home of paying cash for a new purchase. Don’t get blindsided – prepare now for the mortgage you may need later.

This entry was posted in Mortgages and tagged , , , . Bookmark the permalink.

Leave a Reply