At the height of the financial crisis, those who were self-employed stood almost zero chance of having a mortgage application approved. But while many challenges remain, the situation is now slightly better for this class of borrowers.
"Lenders are now less paranoid about making non-standard mortgages because their financial picture has improved," says Keith Gumbinger, a vice president at HSH Associates (www.hsh.com), a firm that tracks the mortgage industry.
The slight easing on the part of mortgage lenders comes at a welcome time for many white-collar workers who, after losing their jobs during the recession, decided to start a home-based business.
"These are people who had substantial skills in such fields as accounting, graphic design, public relations and IT. Because they couldn't find employment to use their skills, they went into consulting," says Sid Davis, a self-employed real estate broker who's worked from home for a lengthy period.
Davis says many who've started a home-based business in recent years have found their current residence unsuitable. Because of that, they're now seeking to buy, and finance, a home to better serve their needs.
Davis encourages those who are attempting to grow their entrepreneurial operations to look for a property with a convenient main floor space for their office, one that also has a separate entrance for clients.
"If you can help it, you don't want your company hidden away in an upstairs bedroom," Davis says.
In addition, he says entrepreneurs seeking a good setting for a home-based business should thoroughly investigate whether any community they're considering allows, or forbids, such enterprises.
"Some homeowner associations don't permit you to have a business and are strict about their rules. Others don't have any such rules or are lax about the ones they have," Davis says.
Here are a few pointers for self-employed homebuyers:
-- Inform yourself about the basics of the current mortgage industry.
Many homebuyers -- especially first-time borrowers --are in the dark about the meaning of the word "mortgage" and how the system works. Because they lack any experience in this area, they're shy about asking questions, says Leo Berard, charter president of the National Association of Exclusive Buyer Agents (www.naeba.org).
But as Berard says, the basic concepts of mortgage lending aren't so complex that you can't grasp them in a short period of time. Start with a basic Internet tutorial, available through the website of the U.S. Department of Housing and Urban Development (www.hud.gov).
Also, Berard recommends you buy a book or two on the subject and suggests "Mortgages for Dummies," by Eric Tyson and Ray Brown.
-- Seek out face-to-face meetings with mortgage lenders.
Most mortgage lenders are comfortable handling loan applications by phone, fax, email or overnight delivery. But Gumbinger, the HSH Associates vice president, encourages self-employed applicants to request a meeting in person.
"Meeting at the lender's office won't give you an enormous advantage. But it could help you make your case and mean you're treated somewhat more seriously," he says.
-- Bring your basic documentation with you to the lender's office.
Nowadays mortgage officers, (also known as "originators"), have to work harder than in previous years to assemble files that meet the exacting requirements of their underwriters. Because of that, they're grateful to borrowers who make their jobs easier through advanced preparation, says Dale Robyn Siegel, a mortgage broker and author of "The New Rules for Mortgages."
Siegel says ideal loan applicants who are self-employed collect key documents showing their financial strength before they even approach lenders. These include multiple years' worth of tax returns, along with statements showing the present value of such holdings as savings accounts, stocks, bonds and retirement funds.
Mortgage officers also appreciate applicants who've scrutinized their credit reports in advance of seeking a loan. That way, the prospective borrowers can identify and try to correct any inaccuracies or blemishes in their credit before submitting a loan application -- a step that's especially important for the self-employed.
Under federal law, you're entitled each year to one free credit report from the three large credit bureaus: Equifax, Experian, and TransUnion. Just go to this website: www.annualcreditreport.com to get started.
You'll also want to access your credit scores. Such scores, which draw on data from the credit bureaus, provide lenders with a quantitative measure of a person's credit risk. Most lenders use FICO scores, pioneered by the Fair Isaac Corp., or another similar scoring system.
Generally, you need to pay a fee to obtain your credit scores. One approach is to buy these through the Fair Isaac website: www.myfico.com. You can also receive credit scores through the credit bureaus. FICO scores typically range from 300 to 850 -- the higher the better.
-- Remain in close contact with your lender until your mortgage closes.
With a recent downturn in the number of applications to refinance mortgages, several major lenders have announced large-scale layoffs. That can mean heavier workloads for those still in the business.
Gumbinger says you can make life a little easier for your lender's office staff by staying in touch and responsive to their needs while your loan is in their pipeline. For example, that might mean responding quickly to their request for a profit-and-loss statement for your business.
"People who stay in touch are more likely to get their loan approved and closed in a timely manner. They're less likely to have their application stuck in a pile of papers on someone's desk," Gumbinger says.
(To contact Ellen James Martin, email her at firstname.lastname@example.org.)