New regulations make mortgages tougher for the self-employed

Mortgage form

Mortgages are becoming much tougher to get for those who are self-employed. Image: Flickr / Alan Cleaver / CC-BY-SA

In the United States, new regulations on mortgage lending are slowly coming into effect. The latest regulations are focused on limiting the risk of mortgages. The regulations, however, are hitting self-employed individuals the hardest.

New lending rules

As a way of limiting the amount of risk, mortgage loan officers are required to disclose the amount of money they will make off a mortgage deal. Banks will be required to maintain at least a portion of the mortgages and loans they underwrite. If a loan has a 20 percent or higher down payment (twice the current standard), banks would be able to avoid the risk-retention requirement. Finally, low-documentation or no-documentation loans would face even stronger underwriting standards. Industry experts estimate that, together, these standards could easily increase the standard down payment to 20 percent or more while making low-documentation loans very scarce.

A place for low-doc loans

Low-documentation or no-documentation loans got a very bad name after the mortgage crisis. These so-called “liar’s loans” were often used in combination with zero-down mortgages to help borrowers qualify for bad credit loans that they would not have otherwise been able to get. These zero-down loans were often the first loans to start going into foreclosure when the crisis hit. This was not the intention of low-doc loans, however. Low- or no-documentation loans were originally intended as a way for self-employed individuals or non-traditionally employed borrowers to qualify for mortgages. Self-employed individuals often have a difficult time meeting traditional underwriting standards. Without pay stubs and with full tax documents only filed once a year, proving income can be very tough.

New options for self-employed

Though the new limits on mortgage underwriting are making mortgages tougher for self-employed individuals to get, funding is available. New small small business lending programs are increasing the amount of funding available for entrepreneurs. Small business loan guarantees through the Small Business Jobs Act are helping increase lending to businesses. When these business owners want to purchase a home, however, they will likely end up having to put more on the down payment and pay a higher interest rate to compensate for the higher risk of lending.


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