Self Employed Just out of Luck in getting Mortgage Financing?

The Federal Reserve announced yesterday additional plans to buy mortgage backed securities from Fannie Mae and Freddie Mac in an attempt to drive mortgage rates down to as low as 4.5% for conventional mortgages (those mortgages less than the new limit of $625,500 (previously $417,000 ). While these new low mortgage levels are great for those buyers who have a conventional job where they can provide documentation of their income by providing a W-2 tax form, the borrower who is self-employed is currently effectively shut out of the mortgage market.

Self-employed borrowers used to be able to qualify for a “Stated Income” loan where they would simply provide an estimate of their annual income. Most borrowers who are self employed utilize siginificant tax writeoffs that reduce their reported income on their tax returns, so even providing tax returns often do not support the borrowers ability to make the loan payments. Many lenders have simply stopped makikng stated income loans due to the abuses that many borrowers and mortgage brokers made in overstating income, that eventually labeled stated income loans as “liar loans”.

There has been some speculation that investment funds may start to be formed soon to make loans to well qualified self-employed borrowers, but at the moment, the self-employed home owner is finding themselves with little or no ability to refiinance their home or to qualify for a new loan to purchase a home. The Federal Government must find a way to deal with this situation if they expect to free up the credit markets and actually benefit the housing market.

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