Home prices in the Chicago area are down – and for those looking to make a move, it’s a buyer’s market. Some mortgage companies are looking to cash in as well. Incentives are everywhere. In some cases, applying for a home loan is as easy as clicking the mouse. And people are buying.
Last month, home sales in Chicago were up by nearly 42 percent compared with February 2009. This boost was helped by the fact that the median home sale price in February dropped more than 19 percent since last year.
With interest rates at near-historic lows, it should be a great time to slip into something more comfortable – by refinancing, getting a good deal on a home, or taking advantage of the $8,000 first-time buyers credit.
But before you run out to a broker or a bank for a mortgage, ask yourself one important question: Are you self-employed?
If you answered yes, ask yourself a second question: How long have you been self-employed?
The answers could very well determine whether or not you’ll be able to buy that house you’ve been dreaming of.
Rob Migasi, a senior mortgage banker for 1st Advantage Mortgage in Park Ridge, said the days of qualifying anyone with a pulse are long gone.
“I call it ‘the triangle of lending’ – credit, income, and assets. A few years back, you could be strong in only one or two of those areas and still get a loan,” Migasi said. “You could even be weak in all three of those areas and get a loan.”
“Nowadays, you have to fit all three of those criteria,” Migasi said. “You have to have strong credit, you have to have assets, and you have to prove that you make money.”
And in an economy with high unemployment, many have turned to starting their own businesses – but that has come at a cost. Would-be homeowners who file a 1099 rather than a W-2 form are finding out that being self-employed may be a roadblock in refinancing or buying a home.
“If you are a salaried employee, recently lost your job and decided that you’re going to start a business – you have no history in this business,” Migasi said. “So, if you’re going to go and sell widgets, there is no way that an underwriter will be able to say, ‘Hey, he’s going to make money, so he can afford this house.’”
That means that 1099 filers with low debt-to-income ratios, large down payments, and even stellar credit may not be able to secure a mortgage, especially if they have owned their businesses for less than two years.
And even if you currently have a mortgage and are able to sell your home, you may not be able to qualify for a new mortgage under the more stringent guidelines.
“We look for borrowers who are going to pay us back,” said Jim Lynch, CEO of Leaders Bank, a financial institution that caters to business owners’ and entrepreneurs’ special needs.
Lynch said that loan defaults by borrowers who were never qualified to borrow in the first place have made lenders gun shy and conservative.
And because the majority of mortgages are held by Freddie Mac and Fannie Mae, few underwriters are willing to think outside of the Freddie/Fannie box and take on the risk of lending to an otherwise financially healthy, self-employed borrower.
“A person like that may be well-qualified to get a mortgage, but may not be able to find a mortgage just because the availability of dollars in this marketplace is pretty scarce,” Lynch said. “And that’s the unfortunate thing.”
Even though it’s a buyer’s market, some entrepreneurs looking to take a chance on a new venture may have to wait before they can find someone to take a chance on them.
Tips for the self-employed looking to qualify for a home loan
-If your business is brand-new, you may have to rent until you can get six months to a year of financial documentation of your earnings on paper.
-If you don’t want to wait that long, you can try to secure a loan with a local community bank. Often, banks that maintain a portfolio themselves, instead of trying to sell the mortgage to another company, are more likely to be able to lend, because they aren’t restricted by the same Freddie and Fannie guidelines that the majority of lenders are strictly following.
-A tip for the newly self-employed: consider reducing the number of deductions you take as business expenses. The more money you deduct, the less income is available that the lender can use to qualify you for a loan.