I'm self employed and can't get any love from the lenders

April 14, 2009 3:08 PM

How do I get a mortgage if I'm self employed?

I'm self employed, have been so for about 2 years, business is doing very well in spite of the economy, I work from (a rental) home and have decided its time to buy a house. Nothing too fancy just a little 2 bedroom where I can work and play and all that.

I have good credit, a good chunk to put down but whats killing me is lenders are looking only at my 1040 Schedule C which is my income after all of my deductions. Basically the amount I'm taxed at. I make all the legal deductions I can so I don't get brutalized by the IRS however this makes my income look significantly lower and basically impossible to provide funding to.

No one at the bank has any answers other than either "Make fewer deductions" which means I'll pay significantly more in taxes, which means I can't put any money into savings. Or "Save more money" even if I save every penny I won't be able to buy a house for at least 5 years at which point who knows where housing will be.

Are there any lenders who specialize in the self employed or are a bit more reasonable and take more into account than just your tax returns?

Are there any options I have other than "wait"?

posted by Scientifik to Work & Money (10 answers total)

For every tax deduction you take, you had a corresponding expense, and these expenses may even be larger than the deductions you take (e.g. you can only deduct 50% of certain expenses). So on what grounds would you say that your actual income is higher than stated on your tax return?

Now, in the olden days (i.e. two, three years ago) you'd be looking for what's called a no-doc mortgage (a.k.a. stated income or liar loan, where you tell them how much you make and they trust you). I have no idea whether those are still obtainable in the current lending climate, but I bet they are tougher to come by. Still, have you talked to a mortgage broker, or just banks? If the latter, call a broker and ask their advice.

Keep in mind that you will almost certainly pay a higher interest rate on a no-doc mortgage if you get one. So run the numbers and see if it makes more sense to pay that higher rate, or to go ahead and take fewer deductions on your 2008 taxes and get a more traditional mortgage instead.
posted by kindall at 3:24 PM on April 14, 2009

Although I have some gripes with the whole industry, this is exactly what mortgage brokers do. They are the experts in the requirements of various lenders and the various loan products. If you talk to one, they should be able to tell you what you'll qualify for and how to improve your application.
posted by katemonster at 3:24 PM on April 14, 2009

Deductions are for reducing your income for the expenses related to your business. You should not be taking deductions for expenses that aren't related to your business. If you are only taking deductions that are actual business expenses, then your income after deductions is correct and you just don't make enough money for that lender's criteria. If you are taking deductions for expenses that aren't related to your business, then your problem will go away when you start to file your taxes properly. Of course, there are always some grey areas, but you still can't have it both ways.

One exception: are you deducting part of your rent as a business expense? If so, you may be able to convince a lender to take that into account and increase your net income by that amount.
posted by ssg at 3:24 PM on April 14, 2009

Are you saying that, by just saving money, you'd be able to buy a house in five years? That's really pretty good.
posted by amtho at 3:36 PM on April 14, 2009

I'm self-employed and I just took out a mortgage from Bank of America. If your credit is good enough, there are no-documentation options. I didn't have to show as much as a tax return. I just closed my loan at the end of March and in fact, just made the first payment on my new home. I'm happy to provide my contact's name at the bank.

disclaimer: yes, I know that this is what got a lot of people in trouble. It made getting my loan a whole lot less painful.
posted by neilkod at 3:53 PM on April 14, 2009

Form an LLC or something and pay yourself a salary as an employee. Talk to a tax guy or CPA or something on how best to set this up.

If you're going to be contracting long-term and one of your goals is to be able to buy a house, then you should see if you can do something like this.

B/c it's not just the past that they're looking at (like tax returns) but also your projected, steady, future income (your last X pay stubs). If you're just contracting as a solo dude (like lots of people) you generally don't have the latter.
posted by reddot at 6:47 PM on April 14, 2009

I'm self-employed as a writer (talk about something that doesn't lend itself to lending!) but I successfully got a mortgage through a reputable mortgage broker and am now re-financing with her, due to drop in interest rates. Memail me if you want her info. I'm not sure if she works outside of New York, but she might be able to refer you.

There were some complaints about my high deductions early in the original mortgage process as I recall but it didn't turn out to be a problem ultimately. I do have very good credit and I had a small inheritance that helped with the downpayment.
posted by Maias at 6:49 PM on April 14, 2009

Ask around your circle of self-employed friends. One will probably be able to hook you up with a friendly loans officer at a local bank. It worked for me.
posted by bonobothegreat at 10:44 PM on April 14, 2009

Shop around and be prepared to hear no a lot. You only need to hear yes once. If your credit is really solid (like at least over 700 FICO, preferably over 750) then you really shouldn't have a problem finding someone willing to lend you a reasonable amount of money. Buying a cheaper house is a (probably obvious) option too. A bank that says no at $x amount might say yes at $x amount - $50k or whatever.
posted by imabanana at 11:35 PM on April 14, 2009

For every tax deduction you take, you had a corresponding expense, and these expenses may even be larger than the deductions you take (e.g. you can only deduct 50% of certain expenses). So on what grounds would you say that your actual income is higher than stated on your tax return?

I can't speak for Scientifik's personal situation, but perhaps as a self-employed person his/her business-related expenses are a larger portion of total income because of being self-employed?

For example, working out of a home office might mean part of your rent is a business expense. Internet, telephone, electricity, heating, all required for your business. Car to visit clients, also a business expense. And so on.
posted by Mike1024 at 12:43 AM on April 15, 2009