Much has been said recently regarding the perceived heavy handedness of the Federal Government as it pertains to residential mortgage financing. Lost in all this though is the impact these changes are having on those individuals who have, for one reason or another, decided to work for themselves versus earning a more ‘structured’ or traditional employed income.
In the past, self-employed individuals were able to provide proof of income in any number of ways such as bank statements, invoices, third party confirmations, and/or internal financial statements. Many lenders also offered stated income mortgages where we could state a reasonable amount of income for people that were self-employed to account for all of the write-offs they have that employed people don’t have. Now our options are limited, as are the lenders that will entertain such applications.
It is now obvious that those individuals who are self-employed, and use all means at their disposal to minimize their income for tax purposes, will find their mortgage borrowing power limited by those traditional lenders still willing to accept such applications. While there will always be non-traditional lenders out there who are prepared to assist the self-employed applicant, this assistance comes with higher fees and interest rates and lower overall mortgage amounts.
What do self-employed borrowers need to do going forward? It is imperative that you take a serious look at your current practice as it pertains to income declared and look to declare higher levels of income in future. All lenders require a 2 year average of income for self-employed people so it will take some time to bring your income up. If you start with the 2012 tax year then it will take another full year until spring 2014 before you can file for 2013 and bring your 2 year average up. In the meantime you may not be able to borrow any money.
As mentioned in one of our earlier issues, we have seen many quality clients turned down because they are declaring too little income. This is a very serious matter and will put many self-employed clients in jeopardy of borrowing money if they don’t start to declare more income.