Oct 17, 2007

Self-Employed and Want to Buy a House? Good Luck

As we all know, for all its joys, being self-employed is no bed of roses. One of the bad things about it is that you're discriminated against in ways that wage slaves (employees) are not. One of the worst forms of discrimination comes when you want to buy a house. Lenders make it much more difficult for the self-employed to obtain a mortgage than they do employees. Because you don't have an employer to verify your income, they demand to see copies of your recent tax returns, a profit and loss statement, bank statements, and may even ask for copies of your contracts with your clients.

The self-employed often use stated-income loans that don't require as much documentation as regular loans. The price for using these loans, however, is a higher interest rate and larger down payment. I experienced this myself when I purchased a condo with a stated income loan several years ago. I had to put down more than 20% and pay a slightly higher interest rate. Even then, I was able to get the loan only because I had a high credit rating.

A recent story in USA Today reports that, due to the problems the mortgage loan industry is experiencing, obtaining loans is getting even harder for the self-employed. Many companies that provided stated income loans to the self-employed have gone out of business. And others have tightened their standards.

If you want to buy a home some time in the near future, you need to plan ahead to make sure you qualify for a loan. This may require that you save more money to enable you to make a large down payment. In addition, you'll want your net self-employed income to be as high as possible the two years before you apply for your loan. The key word here is "net." The more deductions you take, the lower your net self-employed income will be. Ordinarily this is great because it saves you taxes. However, if your net income is too low you may not be able to get a loan. If you plan to buy a home in the next year or two, you may wish to forego some deductions to make your net income as large as possible.