Self-Employed and Can't Qualify for a Mortgage?
The mortgage crisis has had a disproportionately negative impact on self-employed borrowers. In retrospect, it's easy to see how this happened. And it's important to understand who's to blame, how the blame has shifted, and what can be done to adapt to the new lending standards in today's market.
Some of the first program casualties of the mortgage meltdown were the stated income, stated asset (SISA), and no income, no asset loan (NINA) programs. These programs were initially created to assist self-employed borrowers with great credit and good equity.
Since the majority of self-employed borrowers legally write-off a good portion of their income, they are not allowed to use all of it to qualify. Instead, underwriters use their adjusted gross income (AGI) to qualify.
The SISA and NINA programs allowed self-employed borrowers to state their actual income without having to prove it with tax returns.
Soon, in keeping with the now infamous greedy big bank mentality, these program guidelines were expanded to include W-2 wage earners, sub-par credit worthy borrowers, borrowers with little equity, and un-proven first-time home buyers.
Borrowers were qualifying for loan amounts that they could never afford. Needless to say, the more the qualifying criteria loosened, the worse these loans performed. Soon, defaults began to pile up and the rest, as they say, is history.
Who's to Blame?
The federal government's (Fannie, Freddie) misguided policies and the greed of Wall Street and big banks were initially to blame for allowing such lax underwriting guidelines. Opening up the SISA and NINA programs to less qualified borrowers eventually spoiled things for credit-worthy self-employed borrowers.
Smaller lenders and mortgage brokers also contributed by writing loans that they knew were unaffordable. Without question there were some shady individuals and companies that took advantage of these programs. They were negligent in their duties to both limit the amount of income borrowers were stating, and to warn borrowers of the consequences of buying homes they could not afford.
However, the majority of small lenders and brokers were simply following the guidelines that were encouraged by the federal government and written by the big banks. While this is not wholly excusable, it does offer perspective on the rampant “blame-the-broker” theme that the politicians, banks, and the press ran with in the months following the meltdown.
Borrowers who knew they couldn't afford these homes cannot escape their share of the blame either. Exaggerating or lying about income to buy a new home is at best irresponsible, and at worse criminal.
Still, this doesn't explain why credit-worthy self-employed borrowers are still being left out in the cold. After all, the majority of SISA and NINA programs performed well when they were limited to the original qualifying criteria.
We still hear the complaints from self-employed applicants today:
- I've always paid my bills on time
- I've got perfect credit
- I'm being punished for being self-employed
- It's not fair
All of these complaints were probably valid three or four years ago when borrowers were caught off guard and struggling to understand the new lending reality that was blanketing the country.
But today's hard truth is that these borrowers now share in the blame by failing to adapt to the new lending standards. If a borrower needs to show a specific amount of income to qualify for a home, they have to pay taxes on that amount.
CPA's aren't doing their self-employed clients any favors by soley focusing on how much they can write off or how they can get away with paying the least amount of taxes.
CPA's should be focusing on their client's over-all finances. They have a fiduciary duty to inform them about how their taxes will affect their borrowing ability. Too often they fail to do so.
Meridian Home Mortgage understands that there is a real need for stated income programs in today's market. After all, tax write-offs are legal. And these programs actually worked before the guidelines were expanded.
While stated-income programs might begin to pop up at some point to fill the void, they will undoubtedly be very restrictive. Therefore, the only real full-proof solution lies with the borrowers themselves.
Ultimately, it's the borrower's responsibility to initiate a dialogue with their CPA. Discussing write-offs and future mortgage related plans has never been more important. Writing everything off or showing a loss just won't work anymore - even if those write-offs are legitimate.
Adjusting tax deductions to improve their AGI is really all that's needed. In other words, borrower's have to stop writing-off so much and pay more taxes on the income they earn.