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Loans Tougher For The Self-Employed?

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Posted On: 03/05/2014

Question:

New mortgage regulations went into effect in January. How much harder will they make it for self-employed borrowers to get a loan?

Answer:

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It’s true that new mortgage standards were introduced in January, but in many ways the “new” standards are not new at all.

In fact, the best way to look at the new rules required under the Dodd-Frank Wall Street Reform and Consumer Protection Act is to go back to the 1990s. At that time, virtually all lenders required fully documented loan applications.

In the period that led up to the foreclosure meltdown, borrowers could avoid documentation requirements with “no doc” and “low doc” loan applications. Such quickie applications are largely out — but not entirely.

Now, lenders are requiring pretty much the same paperwork as the 1990s. For the self-employed borrower, that means you’ll need to supply tax returns, leases, complete financial statements, etc., just as it was before the housing boom.

Not only are the new rules largely like the old ones, in many cases they are the old rules. For instance, FHA and VA loans automatically are “qualified mortgages” under the new standards, so those programs are unchanged.

Under Wall Street Reform, most lenders will make QMs that meet certain standards; however, lenders also can make loans that do not meet those standards, so-called non-QM financing. Because non-QM financing means greater risk for the lender, you might find higher costs but also a wider range of loan options, including jumbo mortgages, loans with a debt-to-income ratio of more than 43 percent and interest-only financing.

Most lenders have been following these rules for some time and are entirely ready for self-employed borrowers. One study from October 2013 found that 80 percent of the loans being originated at the time would qualify for qualified-mortgage status under the 2014 rules. The Consumer Financial Protection Bureau said in January that roughly 92 percent of all loans were in compliance before the rules even went into effect.

In the end, self-employed borrowers will have plenty of loan options for 2014. You’ll be able to get financing under the new rules, and you will likely get it faster than under the old system.

Ellie Mae, a company that provides closing software, reports that in December 2013 it took 43 days to close a loan, compared to 55 days the year before.

No less important, lenders will want your business. Why? Loan originations are expected to fall in 2014 because of greatly reduced refinancing activity.

At the same time, self-employed borrowers are becoming a larger part of the work force. A report from Intuit estimates that there will be 40 million self-employed workers by 2020.

Simply put, the self-employed cannot be ignored by the lending system.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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