The Self-Employed Can't Get Mortgages

The government's recent moves to help the mortgage market have made it easier for many people with decent credit scores to get a loan. But for many self-employed people -- even those with perfect credit -- the mortgage freeze has yet to thaw.
We certainly expected to see a reversal of the loose lending practices that led to the current economic situation, but some economists say lending standards have become overly restrictive, helping push down home prices even further.
The volume of jumbo loans fell by more than 70%. "Underwriting criteria have swung from foolish ease to tighter than any in modern times," says Lou Barnes, a mortgage banker in Boulder, Colo.
The changes are increasingly frustrating a group of borrowers whom banks once coveted: affluent self-employed professionals such as doctors, lawyers, accountants and small-business owners.
An example:
Hubert Noguera, a 38-year-old medical-device engineer who also owns a small business, is one of them. He 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. Mr. Noguera says 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.
Banks have turned down the loan because the amount he's requesting appears high relative to the portion of his income that he can fully document -- and they won't consider his other income, says his mortgage broker, Connie Madrid.
The chief problem for self-employed people is that they don't have W-2 forms from an employer to document their full wages. For proof of income, they must rely solely on their income-tax returns. But income for the self-employed is often understated for tax purposes, in part because they tend to take large business-related deductions. Self-employed borrowers who don't take any big deductions won't likely face the same difficulty getting a loan.
In the past, most self-employed people took out "stated-income loans," which don't require borrowers to fully document their income. Such borrowers typically made substantial down payments, had strong credit profiles and paid a slight premium -- around 0.25 percentage point -- on their interest rates. Defaults were low.
That changed as the loans grew in popularity during the housing boom and expanded beyond their traditional market of affluent professionals. Stated-income loans eventually became disparaged as "liar's loans" because borrowers' incomes were frequently exaggerated. Many banks have eliminated stated-income loans entirely, and Freddie Mac -- which, with Fannie Mae, is one of two government-held buyers of mortgages -- will end its stated-income lending program designed for self-employed borrowers next month.