It can be hard for the self-employed to acquire mortgage loansDate posted: 2/20/14 06:45:00 AM
There might be more people who are self-employed than you think. In 2013, 29 percent of the global workforce worked for themselves, according to a survey from Gallup. That equated to 18 percent of all adults worldwide.
There are plenty of advantages for those capable of making a living as a self-employed worker. Some choose to do so because they want freedom to work when and where they want. Others work for themselves because they want to focus on projects they are passionate about. Some might choose the self-employed path because they didn't like their previous jobs or traditional employment. Yet, it's not all good for those making their way on their own. In fact, it can be much harder for self-employed workers to secure financing on a home, according to a report from Zillow, a real estate research firm.
Erin Lantz, vice president of mortgage for Zillow, said it can be an uphill battle for most self-employed mortgage borrowers.
"Self-employed borrowers will no doubt face headwinds when trying to get a loan," Lantz said in a release.
Give credit to salaried workers
Good credit is one reason why salaried workers have an easier time landing a mortgage than those who are self-employed. A report from Zillow found self-employed mortgage shoppers tended to have worse credit scores than their traditionally employed counterparts. Zillow reported 47 percent of self-employed individuals' credit scores fell below 720, compared to just 23 percent of salaried employees' scores.
Similarly, Zillow reported 28 percent of self-employed Americans had credit scores below 680. Only 14 percent of traditionally employees had credit scores below 680.
"Low credit scores, coupled with a mountain of paperwork lenders must complete specifically for self-employed borrowers, make them unattractive," Lantz said.
The median credit score was 692 in April, according to FICO. Potential homebuyers looking to land the best mortgage rates should aim for a credit score of at least 740, according to Zillow.
Prospective buyers should examine past credit reports to find any inaccuracies. The last thing a prospective homebuyer needs is to be turned down for a mortgage because of a faulty credit report. Buyers should also try to avoid major purchases before home shopping because lenders tend to view frugal spenders as less risky.
Another reason why it's hard for the self-employed to land loans
Amy Tierce, a regional vice president for a financial institution in Boston, told CNBC it's usually easier for a traditional worker to start the mortgage loan process than someone who is self-employed.
While a salaried worker needs a few pay stubs, W-2 forms and a bank statement to jumpstart the lending process, a person who is self-employed will find the undertaking more difficult.
"For a self-employed borrower, we have to look at two years of tax returns, and if they're incorporated, we have to look at a corporate return," Tierce said. "So we're looking at way more paperwork for the self-employed borrower than we are for the salaried borrower. It can feel very onerous to keep supplying stuff."
Taking advantage of tax breaks
One of the perks of being self-employed is also part of the problem, according to Glenn Gordon, a mortgage broker in Florida. Many self-employed Americans struggle to secure financing because they take advantage of tax breaks.
"One of the reasons people like to be self-employed is you can minimize what you're paying to the IRS by taking all these deductions," Gordon said. "They're all looking to minimize their bottom-line income, which is great when it comes tax time, but it's terrible when it comes mortgage time and buying-a-home time."
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