In Santa Barbara, most people live in our area due to the â€œlifestyleâ€ (i.e., surfing, outdoors, etc.). Therefore, I would say 60% to 70% of my applications have some form of self-employment income. Therefore, compared to the national average we see a higher percentage of these types of consumers. I can guarantee to you that consumers donâ€™t get declined because they are self-employed. This is an unfortunate misconception.
The mortgage industry has standard rules pertaining to the type of documentation which is necessary for a self-employed Borrower. These are the same â€œfull documentationâ€œ rules that have been in existence since I started in the business in 1991.
Hereâ€™s the â€œrubâ€â€¦.. There are 2 main reasons that the self-employed Borrowers have a more difficult time getting a mortgage loan.
1) For the most part, Loan Officers and Processors donâ€™t have the proper experience in handling this type of borrower profile. Not only do these Borrowers have cumbersome partnership/corporate tax returns but they are usually is conducting numerous business transactions simultaneously. This complexity usually leads to an improper evaluation of the consumerâ€™s situation and results in a decline of the loan request. Therefore, consumers need to select a Loan Officer that has vast experience with the self-employed Borrower.
2) Most self-employed Borrowers try to take MAXIMUM advantage of the deductions allowed by the IRS. Unfortunately, a high percentage of these consumers simply get overzealous with this idea. Sure, you might be able to write-off the Dodger tickets since your brother in-law is a â€œcustomerâ€ but was that a â€œrealâ€ expense? No! Therefore, if this is done too frequently, the â€œexpensesâ€ are overstated. This mistake leads to an income stream which is usually insufficient for the loan request!!
There you have it! Iâ€™ve been able to finance many self-employed Borrowers over the years and a lot of those files were not that the difficult.
The main problem for those who didnâ€™t qualify is that they simply got â€œcrazyâ€ with their deductions (Dodger tickets. Really??). Also, during the â€œno docâ€ loan era, this type of Borrower seemed be more of a â€œrisk takerâ€ and happily took-out huge loans or large HELOCâ€™s. Therefore, a lot of these Borrowers are simply â€œover leveragedâ€ as it relates to their â€œtrueâ€ income.
Happy House Hunting!