New rules have made the home buying process a bit trickier if you own your own business, but it’s not impossible.
There was once a time when, if you were self-employed, that it wasn’t that much harder to get a home loan than if you were gainfully working for someone else. Lenders used to use your “stated income,” with very loose rules on verification. At the height of the subprime lending craze about a decade ago, it was pretty easy to get a loan without any type of income verification. In some cases, your tax returns weren’t even needed to prove you earn what you said you earned.
Of course, we all know that this was one of the many bad lending practices that contributed to the real estate meltdown that hit the industry hard beginning in 2008. As it turned out, there might just have been a few home buyers out there who weren’t completely truthful about their qualifying income, and purchased homes they could not afford. Shocking, right? 🙂
So why was it so easy to get a loan back then without having to go to great lengths to prove your income? There are several reasons, but for the most part, it all came down to the fact that 10 years ago the market was swinging wildly upward. No matter what might happen in a loan default, the lender would easily be able to recoup any potential losses through the foreclosure process by reselling the home at a higher price.
Also, the mortgage market was equally as wild on the stock exchange. Bundled mortgages being sold as stocks were (for a while) increasing in value. Again, when there’s money to be made, it can be easy to look the other way on certain risk factors.
Of course, in the aftermath of the “Great Recession,” the mortgage industry overall clamped down on those potentially unscrupulous lending practices, much to the chagrin of the self-employed, who were hit big by these changes. That being said, the newer lending rules have made the real estate industry a better place overall, with accountability factors put in place for both lender and borrower.
How do these lending rules affect the self-employed?
Nowadays, the qualifying process for those who own their own business has become a bit more stringent. Most lenders will no longer accept “stated income” as a method of verification for self-employed buyers. Usually, a minimum two consecutive years’ worth of completed tax returns is where your lender may start with the verification process. Other items necessary will include a verifiable P&L (Profit & Loss statement) and bank statements. If you’ve been in business less than two years, or have wildly fluctuating income from one year to the next, you may be required to provide proof of other assets as a backup. Of course, if you’re purchasing a home jointly with another person such as your spouse, you may be able to include their income, as long as they are on the loan as well.
The main thing is, that lenders want to protect their risk, as well as yours, by making sure that you are able to afford the home you wish to purchase. Since they are relying solely on your word and your records (In other words, they can’t request proof of income from your employer, since you don’t have one), they have to insure the risk is safe. Your best bet is to make sure you have all of your financial records updated, and that the income you generate from your business will cover your mortgage payment without risk to your other financial responsibilities.
Learn more about how YOU can qualify for the home of your dreams by contacting the Lichen-Hooper Real Estate Team today!