New Snags for the Self-Employed
By LISA
PREVOST JAN. 19, 2014
EXCERPTS
Borrowers who are self-employed may
have a tougher time obtaining a mortgage under new federal regulations
requiring lenders to verify applicants’ ability to repay.
Effective this month, the rules,
created by the Consumer Financial Protection Bureau as part of the Dodd-Frank lending reforms, set up standards
for "qualified mortgages," or mortgages considered low-risk for both borrowers
and lenders. Lenders who make loans within these parameters are protected from
legal recourse should the loans go bad anyway.
One of the chief requirements is for
lenders to verify borrowers’ income, and confirm a debt-to-income ratio of no
more than 43 percent (the percentage of monthly gross income used to pay
monthly debts). Borrowers who own their own businesses or are otherwise
self-employed are likely to find their incomes being analyzed in greater
detail.
Lenders are free to make loans
outside of the qualified mortgages regulations " and therefore outside of the
legal safe harbor. These loans can offer some flexibility.
But
the guidelines for non-agency loans (mortgages sold to private investment
entities rather than Fannie Mae or Freddie Mac) are also tight as investors seek to limit
their exposure, said Matthew Hackett, the underwriting manager of Equity Now, a
direct mortgage lender based in Manhattan. "I've seen investors
lower their debt-to-income ratio from 45 to 43 to fit into the Q.M. box," he
said.
When
it comes to gauging business income, some investors are requiring a system that
asks borrowers to use two methods of calculation. "You have to calculate both
and use the lesser," Mr. Hackett said. Applicants might find they can borrow
less than expected or must come up with a larger down payment.
The
regulations have discarded the no-documentation loans once popular with
self-employed borrowers. Michael Moskowitz, the president of Equity Now, says
that decision is an overreaction to the previous decade’s excesses, and one
that will hurt the average self-employed person.