Being your own boss gives you a lot of benefits such as no boss and having flexibility in your life. But being self-employed also means red flags for lenders. It can be tough to get a loan with the stringent rules put in place these days.
According to Fannie Mae, a self-employed person is considered any individual who has a 25% or greater ownership interest in a business. Nearly 15 million Americans are self-employed, according to the Pew Research Center report.
Fannie Mae recently issued less stringent rules for the self-employed including allowing a person with a shorter history of self-employment (from 12-to-24 months) be considered for a loan in certain situations. It used to be borrowers had to have a two-year history of prior earnings.
Anthony Piccone, chairman of 7th Level Mortgage LLC in Cherry Hill, N.J. said self-employed borrowers can qualify for all types of mortgages – with the right help. If they stay under jumbo loan amounts, which conventionally are $417,000 in most areas of the country, they can purchase a home with as little as 3.5 percent down.
If they are veterans or if they purchase a home in a USDA eligible area, they can even purchase a home with no money down.
He admits that self-employed people’s tax returns do not show adjusted gross income to support the debt loan, which means the new borrower might not be able to purchase a home or qualify for a loan.
But some self-employed people go through the home buying process with flying colors.
Here are a few examples of hardworking, self-employed men and women who took the chance on getting a home loan and are now successfully living in their homes:
Large down payment with no-doc loan
James Pollard was intimidated by the home buying process, especially since he didn’t have a W-2, pay stubs and all the stuff that’s usually required to get a loan.
But this marketing consultant at TheAdvisorCoach.com is now enjoying living in one side of a duplex while renting out the other unit to pay down his mortgage.
“I moved from one part of the state to the other because lower Delaware is very rural. Upper Delaware is urbaner. It was just time for a change, and I prefer a more urban environment,” he says.
He ended up putting down a sufficient downpayment. The no-doc/no income-check loan he received required at least 30 percent down.
“But I ended up making a larger downpayment than that. The process was fairly smooth. But I can say that it would have been much more of a hassle had I not had that downpayment,” he said.”
Real estate broker finally gets to buy her own house
For years, Desare Kohn-Laski has been helping others find their own dream homes as the broker/owner of Skye Louis Realty in Coconut Creek, Fla. But being self-employed made it a difficult to get the loan she needed to make that dream come true for herself.
“Lenders will look at your last two tax returns which includes all of the deductions that were taken. These tax returns often don’t accurately reflect the take-home pay of self-employed individuals due to tax deductions,” she said.
The process of getting a loan as a self-employed person was slightly more complicated, she says. She and her CPA had to write several letters of explanation to the underwriter, then supply additional documents throughout the process.
“Overall, the process was smooth because I have an accounting background and am aware of what gross, adjusted gross and net numbers on my tax returns meant.”
She advises anyone who is self-employed and wanting to buy a house to have a lender review your tax returns prior to house hunting as it can save a lot of time and emotions.
Kohn-Laski purchased a 1950s fixer-upper on the water and located two blocks from a beach in Deerfield Beach, Fla.
“I did a lot of renovations over the first four months of purchasing the home. I put down enough of a down payment so that I could avoid doing a jumbo loan.”
She chose conventional financing to purchase the home.
“Going through this process has truly helped me be a better realtor because when the buyers call me up panicking about a lender request, I can calm them down and let them know that what they are going through is 100 percent normal.”
Restauranteur finally gets her own home
Amy Lau and her boyfriend, who own several restaurants, a karaoke bar and a direct selling business together in New York, wanted to stop renting and buy a home.
“We first went to Chase, where I have a personal checking account. They told me I would not be able to get a home loan because I didn’t have two years of W2s,” she says.
Since she’s a business owner, she wouldn’t have W2s. She asked a real estate friend of hers what options she would have. She referred to her Quontic Bank, which offered a program for people who have a 1099. After the first meeting, Lau got a preapproval letter and began house shopping.
“I had to put 40 percent down. There was some paperwork involved, but the bank’s team helped with that,” she says. “It’s definitely stressful, even if you have money. But if you find the right team and right people to help you, it’s not bad.