Self-Employed Struggle to Get Mortgage Approval

You’d think a doctor with her own private practice or a small business owner with a six-figure income would have no problem getting a mortgage loan. But think again. Increasingly, self-employed professionals — some of the smartest and most successful people in the U.S. — are being turned down on their mortgage loans.

While there are no hard numbers on how many self-employed professionals are being denied mortgage loans, The Wall Street Journal says that changes in the ways that lenders handle mortgage loans — specifically underwriting criteria — have resulted in an increase in the number of self-employeds being rejected for home loans.

The Journal lists “doctors, lawyers, accountants and small business owners” among the new group of self-employed borrowers who find it increasingly difficult to get a mortgage loan.

The Journal cites the case of Hubert Noguera, a 38-year-old small business owner in Saratoga, Calif. Noguera “can't get approved for a loan, even though he has a strong 800 credit score and is prepared to make a 40% down payment on a house near San Francisco in the $800,000-to-$900,000 range.” Noguera told The Journal he “has assets worth three times the $500,000 loan he's requesting and is in the process of selling his share of a recently inherited residence in Saratoga, Calif., worth $1.1 million.”

Yet Noguera, like a lot of self-employed professionals, still can’t get a home loan. The reason? New mortgage lending rules that place a priority on “full documentation” work against self-employed borrowers. Since self-employed workers don’t have W-2 forms — the typical document lenders want to see before approving a loan — they have to depend on their tax returns to prove their income. But as The Journal points out, income from tax returns is typically understated as self-employed professionals are more likely to take business tax deductions. It’s a “good news, bad news” scenario. Self-employed professionals do get some great tax deductions, but when they apply for a loan, their tax returns will show they earn less money than they might actually earn.

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