Getting a Mortgage Gets Easier - hassle-free mortgages for self-employed or irregularly employed people - Brief Article

Kiplinger's Personal Finance Magazine, March, 1999 by Elizabeth Razzi

Lenders are paring the paperwork for self-employed workers.

The last time Phillip Juett took out a mortgage, in 1993, he had to give the lender several years of income-tax forms, pay stubs and profit statements--and then wait a couple of weeks for the big decision. That's because he's a commission-based salesman for a Dallas printing company, and his income varies greatly from month to month. "I couldn't believe how much information they were requiring," says Juett. "They wanted proof, and then documentation of the proof. I remember having to do a lot of due diligence for them."

But he had an easier time last August, when he applied to Dallas lender Sunbelt National Mortgage for a loan for his new home. He supplied two pay stubs and a copy of his most recent tax form. "I didn't even meet with anyone," he says. "I handled it all over the phone and by fax." He locked in a 30-year fixed rate mortgage at 7% with one-fourth point.

LESS PAPERWORK. If you own your own business, work as a self-employed freelancer or earn commission-based income that fluctuates wildly from month to month, you can now expect fewer hassles when you apply for a mortgage--particularly if you have at least a two-year track record of self-employment or commission earnings. Lenders will take the average of your last two years of earnings, and you'll be considered for the same loans as salaried borrowers.

You may need to supply one or two years of federal income-tax returns and your most recent pay stub. Business owners--or partners who own at least 25% of their business--will typically be asked to supply a profit-loss statement for the business (and possibly the business's tax return).

One reason for the lighter paperwork burden is that Juett borrowed from a lender that relies heavily on an "automated underwriting" system. Such systems are sophisticated computer models that analyze applicants' finances and weigh the risk of default. The leading systems are Desktop Underwriter, developed by Fannie Mae, a company that buys mortgages and repackages them for the bond market, and Loan Prospector, developed by Fannie Mae's competitor, Freddie Mac. Lenders even use these models to size up jumbo loans--those above $240,000.

Rick Pishalski, senior vice-president for FT Mortgage Cos., a mortgage-banking company that owns Sunbelt Mortgage, says they run nearly all their applications through such systems. "If we run a loan through Desktop Underwriter, more often than not we need only one year of tax returns, and we do not need a profit-loss statement from a business. But you do have to sign a statement allowing the lender to check with the IRS to verify your income."

You may be able to get the best rate even with less than two years' earnings. The lender is looking for evidence that your income is going to remain stable or improve. If you recently earned a professional degree in, say, medicine or law, that gives you strong earnings potential that can help persuade the lender to okay the loan.

If you apply on one of the popular Internet-based mortgage sites, you may need some extra help from a human if you have less than a two-year track record on earnings. And whether online or in person, a good lender will let you know up front if you will have to hand over extra paper work before getting approval.

SO DON'T PROVE IT. You don't necessarily have to prove your income at all. If you are self-employed, you-can apply for a "stated income" loan, which allows you to state on the application whatever income will qualify you for the loan you seek. And you don't need to provide any paperwork to document it, either.

But you will pay a penalty for your privacy and may be offered only an adjustable rate. We recently searched E-Loan, an online mortgage broker, for a stated-income loan for $175,000 principal with a 30% down payment. The quote: a one-year ARM starting at 7.5% with 1.13 points. If we were willing to document our income, the initial ARM rate dropped to 4.875% with 1.88 points. Stated-income loans typically have a prepayment penalty if you refinance within the first two or three years.

And the lender won't just take you at your word. It will look to see that you have the assets, such as bank-account balances, that correlate with the income you claim to earn. If you claim $5,000 a month in gross income, for example, the lender is going to scan your bank records for $5,000 deposits.

You will also need to have an outstanding credit record. And you will be asked to sign a form allowing the lender--or the eventual investor who buys the loan--to look up your tax records on file with the IRS. "Someone may look at your tax returns," says Janina Pawlowski, president of E-Loan. But she adds that the lender usually does not look at tax returns unless the loan goes into default.

RELATED ARTICLE: HOME FRONT

BIGGER JUMBO LOANS

You can borrow more money in this spring's home-buying and -selling season without going into higher-priced jumbo territory, thanks to rising home prices.

Fannie Mae and Freddie Mac, the corporations that buy most mortgages for resale on the bond markets, raised the dollar amount on loans they will buy from lenders. That means you don't hit jumbo territory until you borrow more than $240,000. Jumbo rates are now about one-third of a percentage point higher than "conforming" loans that are eligible for purchase by Fannie and Freddie, according to Keith Gumbinger, vice-president of HSH Associates, a company that tracks mortgage rates.