Where are the mortgage loans for the self-employed?
Interest rates and property prices are making now a great time to buy all types of real estate. We already know the window of opportunity is narrowing for the very best gains and spreads, but no matter how bullish some self-employed individuals are, loan options can seem scarce.
This may change soon, as a growing majority of workers are now working remotely, and are often classified as 1099 independent contractors. However, it might take some time to completely transition over. Meanwhile, even though you can virtually be fresh out of bankruptcy and snag a low down payment FHA loan as a W2 employee, new self-employed persons and even real estate investors with great credit and income can find that lenders don’t even want to waste time speaking with them. There is certainly something different about being self-employed.
Mortgage Lending is Easing
There is no question that mortgage lending is easing up. Lower credit scores, higher debt-to-income ratios, and banks that are spending a lot to aggressively compete with each other are making it easier and more affordable to get mortgage loans. That doesn’t mean there won’t be a lot of paperwork and nitpicking. However, the extra hour or two is normally the highest earning hours you’ll ever put in.
The self-employed, and especially the newer self-employed, can face two major challenges:
1. Verifiable and Qualified Income: Mortgage lenders demand tax returns to qualify income for the self-employed. In order to minimize tax liability, the self-employed take as many tax breaks as they are eligible for. That means their allowable adjusted gross income can be minuscule compared to what they really make. They may even show losses in the first few years, despite making six figure plus incomes. Even if you are actually making $1M per year, if you only show you are earning $40,000 on your tax return, you aren’t going to qualify to by much at all.
2. Continuity of Income: You’ll need at least two years of self-employed income in the same line of work to qualify for most loan programs.
Finding a Way to Qualify
The two most obvious solutions may be to work your way into self-employment, or full-time investing over a couple of years so that you already have some history. Nobody wants to pay more in taxes, but do the math. You only pay a portion of your taxable income in actual tax. If you paid 30 percent on reporting $100,000 in income, that’s $30,000. If you would have done that last year, and would have bought a Miami mainland or coastal condo for the median price of around $390,000, the 22.2 percent appreciation rate, plus 3.5 down payment, and equity portion of your payments would make you about $100,000 richer today, than staying in a rental (and making your landlord over $100k richer).
There are also almost always ways to qualify based on your compensating factors. For example, you may be able to borrow money from your IRA to make a larger down payment, and qualify based on your existing income. You may not even have to pay taxes on using your IRA money to buy your first home.
Alternative Mortgage Loans for the Self-Employed
Alternative mortgage programs may enable you to qualify with stated income, or using bank statements to verify income instead of tax returns. Real estate investors have even more loan options available to them, including:
- Income based loans using investment property income to qualify
- Asset and equity based loans such as hard money
- Private money lenders
- Transactional lending for property wholesalers
- Real estate crowdfunding
- Commercial real estate loans
- Business lines of credit
- Seller held mortgage loans
- Using co-borrowers to qualify
Buy Your Second Home First
For those that can’t qualify to buy the home they really want to live in yet, and don’t have enough down payment for an investment property, there is always the option of buying a second home in a more affordable area first. Maybe you can’t afford to buy in Miami, but Jacksonville is a great alternative. Maybe you can’t afford to buy in San Francisco, but you can in San Diego.
