Ask Nancy: New Loan Wrinkles for Self-Employed

You don’t have to tell the self-employed that there are extra costs that go with the benefits. In addition to the long hours and extra responsibility, getting a home loan has always added special challenges. Now that we are into the new Dodd-Frank era of federal oversight, some of the changes warrant an early heads-up.

The 2010 legislation that went into effect on January 10 created the Consumer Financial Protection Bureau, which tightened the rules lenders follow in order to discourage them issuing loans that buyers couldn’t repay. What does this mean? That lenders will require more paperwork to support the income claimed on loan applications.

If you are your own boss and getting a loan is on your horizon, take heart! Just because it may be more difficult to apply for home loan doesn’t mean it’s impossible.

The new lending rules describe eight specific factors that lenders should verify and document before advancing home loans. They include the borrower’s assets, credit history, employment status and other debt obligations. Lenders who fail to do so adequately may be legally liable if a borrower proves unable to repay.

The general rule is that borrowers must provide at least two years’ worth of personal tax returns. Since self-employed people getting a loan often have perfectly valid reasons for fluctuating annual incomes, it’s vital to talk with a broker and lender as early as possible to establish the taxable income level needed to qualify for a loan.

That talk should cover other areas. For instance, self-employed people have greater flexibility than most when it comes to reporting deductible expenses, which can result in lower net incomes. One way to counter that problem is to demonstrate that the expenses incurred will improve their business in the long term. Another approach is to show that similar expenses are not likely to re-occur.

If you are self-employed—and plan on getting a loan—planning is key. Get your ducks in a row now so the loan process doesn’t derail you later. It’s never too early to call me as an early resource before we get to move on to the fun stuff–finding your dream home!

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