New Snags for the Self-Employed
By LISA PREVOST JAN. 19, 2014
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.