Dallas Real Estate Financing: What Are We Going To Do About Mortgages for the Self-Employed?

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Update to the mortgage story. As I said earlier, mortgage broker Ron Schulz told me over the weekend that the biggest hurdle in mortgage financing now is finding mortgage loans for the self-employed. Those deals are near impossible because most self-employed work off K-1 income to control/limit taxes so when they go to get a loan underwriters get all red in the face and say, uh uh no way, this guy has no income.

Well, guess what the most hurtin’ home price range is out there? $750,000 to $1.8 million, right where a lot of successful self-employed want to be.

And look at this email I received from a reader today:

“I recently contacted a lender about purchasing a home for my parents. I told them that I would be able to put 50% down and wanted to finance the remainder. They told me that I didn’t qualify because this lenders policy is to average your income over the last 5 years. Needless to say, averaging income isn’t good for the starting business. They do not take into account the growth rate of a business. Not to mention that I too am a tax planner, so I do my best to make sure that my taxable income is as low as possible.

Ratio of loan to market value apparently has no relevance any more. Lesson learned: By the time I “qualify” for a loan, I will be able to pay cash for this home.”

Now here’s what really gets me hot. We have the Feds trying to keep us from a Double Dip, right, and yet, where’s the financing to allow people, self-employed people, to BUY homes? Not everyone gets a W-2, thought the Feds sure love those because they get their money first. Instead of encouraging responsible lending to this segment, they go and pass legislation that pinches mortgage brokers even harder and passes on more costs to the consumer!

By the way, on his show this week, Ron has special guests Curtis and Paige Elliot of Ellen Terry Realtors.

Candy Evans

Candy Evans

8 Comments

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  3. Ryan C on April 29, 2011 at 7:10 am

    Fannie Mae, Freddie and FHA want two years of self-employment. This typically means two years of tax returns which are averaged unless the most recent year is lower. In which case, that is the income used for qualification. With 50% down and a good credit score (assuming he wasn’t buying them a $2MM house) the automated findings should have only asked for the last year of tax
    returns.



  4. Ryan C on April 29, 2011 at 7:10 am

    Fannie Mae, Freddie and FHA want two years of self-employment. This typically means two years of tax returns which are averaged unless the most recent year is lower. In which case, that is the income used for qualification. With 50% down and a good credit score (assuming he wasn’t buying them a $2MM house) the automated findings should have only asked for the last year of tax
    returns.



  5. Zena D on April 30, 2011 at 3:10 pm

    Don't take it personally, honest. Unfortunately, the sins of some are hurting all. Before 2007 there was a market for loans where someone just stated what they made and they received a loan. Today's lenders now look back at the statistical default rates for each type of loan. IF the default rate is signifigant at all, then they won't do the loan. Why is this? Well is has to do with the people who actually give the money to the lenders to do mortgages: Pension funds, insurance companies, you and me if we want to invest in a pool of mortgages (mortgage backed security) that pays better interest than a US treasury bond.

    When people who invest are afraid that they won't get their money back, they don't give their money to the mortgage company to lend. While the US government backs Fannie and Freddie, Fannie and Freddie and FHA/VA all get their money from the open market. Recently Bernanke and the Fed have been part of that open market but only a part.

    The folks with the money ask the mortgage company, "How likely am I to get my money back based on passed performance of your loans?" If the lender was doing 'stated income' loans as before, they'd say, "We'll you'll get some back but our statistics on how these loans have performed in 2008,2009 and 2010 is pretty bad." Now, would YOU give them your money if they told you that? NOPE.

    So, we're back to where we were in 10-15 years ago, where you have to prove you make the money. The only one ANY lender trusts to tell them that is the IRS. IF you report to the IRS that it takes you 80 cents to make a dollar, then the lender figures that you REALLY DO only have 20 cents left over to pay the mortgage and THAT is what they base their qualifying on. They understand the write off deal, but bottom line, if you tell the IRS something, then that is the only thing a mortgage company will believe because so many have lied before…which is what led in part of the economic disaster we are in now.



  6. Zena D on April 30, 2011 at 3:10 pm

    Don't take it personally, honest. Unfortunately, the sins of some are hurting all. Before 2007 there was a market for loans where someone just stated what they made and they received a loan. Today's lenders now look back at the statistical default rates for each type of loan. IF the default rate is signifigant at all, then they won't do the loan. Why is this? Well is has to do with the people who actually give the money to the lenders to do mortgages: Pension funds, insurance companies, you and me if we want to invest in a pool of mortgages (mortgage backed security) that pays better interest than a US treasury bond.

    When people who invest are afraid that they won't get their money back, they don't give their money to the mortgage company to lend. While the US government backs Fannie and Freddie, Fannie and Freddie and FHA/VA all get their money from the open market. Recently Bernanke and the Fed have been part of that open market but only a part.

    The folks with the money ask the mortgage company, "How likely am I to get my money back based on passed performance of your loans?" If the lender was doing 'stated income' loans as before, they'd say, "We'll you'll get some back but our statistics on how these loans have performed in 2008,2009 and 2010 is pretty bad." Now, would YOU give them your money if they told you that? NOPE.

    So, we're back to where we were in 10-15 years ago, where you have to prove you make the money. The only one ANY lender trusts to tell them that is the IRS. IF you report to the IRS that it takes you 80 cents to make a dollar, then the lender figures that you REALLY DO only have 20 cents left over to pay the mortgage and THAT is what they base their qualifying on. They understand the write off deal, but bottom line, if you tell the IRS something, then that is the only thing a mortgage company will believe because so many have lied before…which is what led in part of the economic disaster we are in now.



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