Self-Employed in Mortgage Limbo

When banks stopped lending money to anyone with a pulse, they stopped lending money to anyone at all, even those with gilt-edged credit ratings. Now that federal government has moved in to unlock the mortgage vaults, loans are easier to come by, but many of those who are self-employed are still out in the cold. Among the victims are self-employed professionals like doctors, lawyers, and accountants, along with small business owners.

The nub of the problem is that the self-employed don’t get a W-2 that they can show a lender as proof of income. They use their tax returns instead, but their 1040 may lowball their cash-flow numbers because of large business-related deductions. In the past, self-employed borrowers often got “stated-income” loans, which didn’t require full income documentation. Since the mortgage meltdown, however, stated-income loans have fallen into disfavor and many banks no longer offer them. Freddie Mac, one of two government-backed buyers of mortgages, will end its stated-income loan program for self-employed borrowers next month.

Big borrowers may also be out of luck in the mortgage market. Fannie Mae and Freddie Mac can’t buy or back mortgages over $729,750, and mortgages for more than that amount, known as jumbo loans, are facing even stiffer lending standards. Many lenders are either refusing to make loans that can’t be guaranteed by the government or are insisting on down payments on jumbo loans as high as 40% of the value of the property. Those who manage to get a jumbo loan will also pay an interest rate as much as 1.6 percentage points higher than that on a government-backed mortgage. Next year, when the limit drops to $625,500, getting a jumbo loan will be even tougher.