Home Mortgage Woes Affect Self Employed

If you've been anywhere near the news recently you know that the burst housing bubble and bank crisis has lead to a tightening of lending at all levels, from consumer and commercial to residential and small business. These recent troubles in the banking and housing sector have lead to significant changes in banks lending decisions and caused funding for self employed individuals (a fairly small, yet important cohort of people in the United States) to disappear almost entirely.

During the boom housing years, one of the biggest growth sectors were stated income loans (also known in the business as the appropriately named "Liars Loans") where borrowers needed to provide no documentation to prove their income. Originally utilized as a niche for self employed people who didn't have a W-2 to prove their income, stated income loans exploded during the housing boom. All that was required to secure a loan was to sign a form stating how much income you made, whether or not you were self employed, and regardless as to whether you could prove it. If you wanted to say you made $250,000 per year and take out a loan based on that amount, no matter how true that figure is, many loan originators would be happy to oblige. Now? Just about every major bank, as well as Freddie Mac and Fannie Mae have virtually eliminated stated income loans.

Over the summer, while looking to capitalize on low interest rates, I inquired about refinancing my house. The current rate that I would have qualified for was a good 1.50% below the rate on my current mortgage, and despite the drop in house prices, I still had 20% equity in my home and a great credit score. I was simply looking to refinance the current mortgage amount and had no interest in pulling out any additional monies, a clear cut simple mortgage refinancing.

The obstacle for refinancing came up when I talked to a friend in the mortgage industry. They told me that since I had left my job and started my own business over the summer, it would be problematic to obtain financing. Sure enough, two different loan servicers told me that unless I had two years of completed tax returns showing the income from my new business, they couldn't help me. I quickly came to realize this was a prevalent phenomenon after speaking with a couple of colleagues who also ran their own businesses and had similar experiences.

This was one small example of the credit market tightening up, and there are numerous such small occurrences daily. Hopefully the situation will turn around; the capital markets will improve, home process will stabilize, unemployment will head back into the low single digits, and mortgage dollars will again begin to flow to all borrowers, including the self employed.