Lending: The Pro’s and Con’s of Being Self-Employed
The job market is tough and more people are turning to self-employment as a viable option. Computer programmers, virtual administrative assistants, virtual accounting professionals, writers, real estate agents, insurance agents and many more professions are all considered self-employed. There are even websites that specialize in helping self-employed professionals advertise their skills.
With the self-employment market rapidly growing, there is one significant disadvantage that many self-employed people are facing: being denied home loans.
We all know that lending standards are tough. In fact, more than 9 million people in the U.S. are self-employed. Many of these people earn good wages, but have a difficult time qualifying for home loans. Most lenders require a minimum of two years’ tax returns, which rarely provide an accurate reflection of take-home pay for self-employed people, especially since these returns are decreased by tax deductions.
In fact, unless self-employed people want to forgo legal tax deductions to show more income to lenders, it is extremely difficult to obtain any type of home loan. The problem is that returns do not reflect true income. Self-employed people are permitted to deduct retirement plans, business meals, entertainment, interest on business loans and even business credit card interest. When banks look up the total income, minus deductions, incomes appear rather bleak.
Some lenders are willing to work with self-employed employed people, especially if the depreciation is non-reoccurring, but this is rare.
Self-employed people need to plan before applying for traditional home loans. The easiest way to do this is to write off fewer expenses in the two years before applying for a home loan. Also, separate business expenses from personal expenses, such as having a business credit card and a personal credit card.
Lenders do traditionally average income over the two-year period, but it is important for lenders to see that self-employed businesses are growing.
One of the easiest ways for self-employed people to obtain loans is to shop around for a direct lender, or hard money lender. These types of lenders offer slightly higher interest rates, but do specialize in working with self-employed people, understanding the risks and write-offs associated with being self-employed.
These types of hard money loans may also be a good starting point to help build credit until banks will offer more favorable terms once their required two-year period has passed.
At least self-employed people know there are more options available to them than simply traditional lenders.