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Self-employed borrowers struggle securing loans

Date posted:  9/2/15 10:15:00 AM Self-employment has its benefits, but securing a mortgage loan isn't one of them.

Marcie Geffner knows all about the benefits of being self-employed. Geffner is a freelance writer from Los Angeles who routinely contributes to Bankrate and HSH.com, a home mortgage site. But Geffner told CNBC she understands there are a few inconveniences to being self-employed. One of the main drawbacks is securing a mortgage loan.

While she was self-employed the last time she landed a mortgage three years ago, trying to refinance her loan last year turned out to be a major stumbling block. Despite providing copies of bank statements and three years of tax returns, Geffner approached a lender who wanted to know much more.

"The lender Googled me, which was very creepy and unexpected," Geffner said. "Then, they started asking for the name of my clients. That was where it started to feel intrusive - crossing a line into my business that I did not expect."

Yet, according to CNBC, the difference between personal and professional life is usually very foggy for lenders when considering for self-employed applicants. Lenders could hold self-employed borrowers accountable for business debts that don't show up on a personal credit report.

Other mortgage snags for self-employed workers
A recent study from Zillow showed self-employed Americans garner 40 percent fewer home purchase loan quotes than other borrowers with a W-2.

Despite self-employed workers claiming they make more money than other borrowers, Zillow said one major drawback continues to be the lack of good credit scores from self-employed Americans. Those who work for themselves are twice as likely to have a credit score below 680 compared to a regular employee, which can make it very tough to secure financing.

While it's not impossible to land a loan with a credit score below 680, scores less than 700 will cause loan rates to go up, according to Zillow. On the other hand, a score above 740 will make a person eligible for the best rates, while scores between 700 and 740 will make a person eligible for most loan programs.

More paperwork means more hassle
Is paperwork ever a good thing? Not for lenders looking to approve mortgage applicants. The study from Zillow showed self-employed online mortgage shoppers received six loan quotes for every 10 given to borrowers who were regularly employed.

"That's the first battle," Erin Lantz, vice president of mortgages at Zillow, told CNBC. "The second battle is actually getting through all the paperwork."

While combing through paperwork of every loan is an arduous process, the task becomes much more difficult for lenders reviewing applications from self-employed borrowers.

"A lot of lenders talk about it like manufacturing costs," Lantz said. "If you have to make a loan - it takes a lot of time in people and paperwork - that's how much costs to product the widget, to produce the loan. For a self-employed borrower, that cost is higher."

To combat this problem, potential borrowers should review all of their paperwork before meeting with any lenders. The more professional the application looks, the easier it will be for a lender to green light a mortgage application.

Securing a mortgage
Self-employed applicants should be well aware of their debt-to-income ratios, which compares their monthly housing expenses with how much they make each month. Lenders typically don't want to give money to a borrower who has a debt-to-income ratio of more than 43 percent, according to Zillow.

If self-employed borrowers can't secure any type of financing, Investopedia said applicants should try to cosign with someone who is a W-2 employee to show the lender they will have reliable income to pay the debt.