by Pamela Reeves
Scripps Howard News Service
You're all set to buy a house, so you gather up your papers and take them to the mortgage lender. You present him with your stuff and wait expectantly.
If you're a certain type of buyer, here's what the lender is feeling: uneasy and even doubtful that the deal will close. What flaw could the customers have that causes the lender to look at them so negatively? 'Eeek! They're self-employed.'
You would think that in a land that holds go-getters and entrepreneurs in high esteem, that respect would trickle down to the mortgage lender. But the fact is, according to PMI, a mortgage insurance company, "self-employed borrowers are twice as likely to default on their mortgage loan."
Such statistics send chills down the spines of mortgage lenders, according to GMAC Mortgage. But in its trade publication, Market Commentary, GMAC offers steps that will help a self-employed buyer pass muster:
- Bring in two full years of corporate or partnership and personal tax returns, including all schedules. Sign them. Also bring in W-2s and 1099 forms that go with the tax returns. This is a pain, but these are the forms that allow the lender to determine your real income.
- The lender will look over your tax returns to see if you're making money. If he can find enough income here to qualify you for a mortgage, you're golden.
- If you say you take no salary from your business, the lender may be able to qualify you from money you have in IRAs, 401ks, alimony and pension funds. If you take depreciation on investment properties on your corporate return, that can be added back in as income for qualifying purposes.
- If you are applying for a loan more than 120 days after your company's last tax year ended, the lender will want to see financial statements that show how profitable the company has been recently. It's better if they're audited, too.
- Make sure the lender doesn't count your debts twice, once as a business expense and once on your credit report.
As an alternative, if you don't want to go to all that trouble and your business is doing well, offer a big down payment. That should ease the transaction considerably.
Higher interest rates have cut into refinancing big-time. But among those who are still trading in their mortgages, almost 80 percent took a sizable chunk of cash out of their houses, a study by the big secondary mortgage company, Freddie Mac, shows.
The survey found that 79 percent of those who refinanced in the first three months this year got a new mortgage amount at least 5 percent higher than the old one. "Although refinancing has dropped off, a larger share of those refinancing their mortgages took out equity," said Vassilis Lekkas, principal economist for Freddie Mac.
Refinancing accounted for only 20 percent of the market in the first quarter this year; last year at the same time, refinancings made up half of the loans. Interestingly, at that time only 57 percent took substantial cash out.
You're probably being inundated with offers for home equity lines of credit, and no wonder. With interest rates moving up at a rapid rate, lenders can make lovely profits on these loans at your expense. Rates on home equity loans now are typically in the 10 percent range and higher. If the Federal Reserve continues to raise short-term rates, you'll be paying even more.
The people who refinanced and took cash out of their houses probably had the right idea for the time.
(Pamela Reeves writes this column weekly for Scripps Howard News Service. E-mail her at ReevesP@shns.com.)
