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When I chose the self-employment route, I had already owned my current home. Yet I am looking to the future toward a home that meets my desires for what I most want now (versus 11 years ago when I purchased this place). I'm not even in the analysis stage yet because the time is not right financially or otherwise for me to make the move. I had heard that it can be more challenging for the self-employed to qualify for a mortgage and that was before the debacle in the banking system. Now I wonder just how much more difficult it may be when the time comes. When one chooses to become self-employed does that mean the death of the dream of home-ownership?
I recently read "The Self-Employment Catch-22" in New York Magazine and it practically made me spit up my perfectly good weekend brunch. I realized the rules were challenging but this statement stopped me in my tracks:
They’re freelance workers, of whom there are around a million in the New York and who constitute about 25 percent of the city’s mortgage market. Strict new rules, established after bad mortgages crippled banks, have made obtaining financing nearly impossible unless the borrower can show a regular paycheck. “Now you can be ready, willing, and able to buy, but you can’t get the money,” says Sara Horowitz, executive director of the Freelancers Union, which has 75,000 members in New York.
The glaring challenge for the self-employed and freelancers among us beyond the usual how to qualify for a mortgage loan exercise is the lack of paper trail proving income. Without that W-2 you are required to find another way of offering a clear, well-documented picture of your income that makes the now gun-shy lenders feel confident that you can pay your mortgage. Anyone who has spent more than 12 months self-employed knows that monthly income fluctuates, sometimes wildly. Lenders don't like see-saw numbers.
In the past, low or no documentation type loans and other creative financing was the answer. No longer. In the UK, the self-certification mortgage is a thing of the past. In the US, entrepreneurs took a real hit with foreclosures bearing a large brunt of the bust since many took out risky mortgages to make the dream of home ownership happen. According to the Wall Street Journal Blogs:
Foreclosures bite entrepreneurs hard. Many self-employed took out risky mortgages (such as “interest-only” and option adjustable-rate) that will reset at much higher interest rates starting in 2009 and coming years. An analysis by the National Association for the Self-Employed found that about 23% of the self-employed — or about 3.7 million of them — hold these “toxic” mortgages.
On the ironic same side of the coin entrepreneurship has been on the rise as traditional employment undergoes radical changes through layoffs, re-organizations, and a changing business climate. As a result, even more people are going to be facing this double whammy of stricter mortgage requirements and the inherent fluctuations of being your own boss. To add more insult to injury the very techniques that benefit the self-employed like home office and other deductions are the same things that can make even a successful business show far less net income than a similarly successful employee with a W-2. The idea of payday loans are becoming an option for self-employed professionals but only those in truly difficult financial circumstances.
Here are some fundamentally good articles on taking that leap toward home-ownership:
- When Should I Buy a Home? Have We Reached the Bottom Yet? What is the Right Price? by Millionaire Mommy Next Door
- How Much Debt Do You Have? and "How Do You Qualify for a Mortgage Loan?" by The Digeratilife
- "Home Prices and Interest: With or Without Interest - Do You Know What You Paid" by Finance for a Freelance Life
- "Buying Property if You're Self-Employed" by Be the Middleman
I had a bit of a hard time finding links out there on personal experiences from freelancers buying homes both before and after the lending crisis. If you are a freelancer/self-employed, what has been your experience with proving income stream and obtaining a mortgage? Whether it was pre or post banking bust, please share your stories in the comments...
Paula Gregorowicz, owner of The Paula G. Company, offers life and business coaching for women to help you gain the clarity, confidence, and courage you need
