I admit, this is more of a "rant" than it is an avenue towards offering a constructive solution to today's lending environment. We all know the days of "stated income" or "no doc" loans are over, (or at least for now...the jury is still out!). There was a reason those types of loans were created in the first place, and they DID have a place in our ever complicated financial world of credit qualifying, FICO scoring, and judgment rendering of who is and who isn't worthy of obtaining home financing. Unfortunately, like many opportunities, there are a few "bad apples" (to keep it simple) that will abuse the offer and ultimately ruin it for those who actually play by the rules. Of course, that's already been proven.
That being said, where or when will the lenders find the happy medium and begin to service those of us who don't exactly "fit" into the standard qualifying model? After reading Stewart Penn's Blog post yesterday: "Jumping through hoops...", there was an insightful comment make by fellow 'Rainer', Eric Kodner, who said: "I've always found it humorous that lenders worry so about the individual who is self-employed (or multiply-employed, with multiple income streams) and yet they have so much confidence in the ability to pay of an individual who has one job which he or she holds at the whim of a single employer. People today who are wage-earners are trembling in their boots. They are one pink slip away from disaster. And yet the lending industry, in its infinite stupidity, regards them as golden."
It got me thinking...Are there any statistics out there showing the percentage of mortgage defaults for self-employed borrowers vs. salaried wage earners? I imagine the banks have already studied this, but I can't find anything on the Internet showing hard data or "favor" on one side or the other. And what happened to the old days of building a "relationship" with the bank?? I guess we already know the answer to that question, and have so for some time: it doesn't matter any more. It's too bad, if you ask me. What happened to the "human factors" in making a decision on who was a good risk and who wasn't?
- Timely payment history? (i.e., never missed a payment in 12 years of self-employment...good times and bad)
- Good credit history (OK, FICO scores prevail here)
- Healthy cash reserves and tangible assets (savings accounts, SEP IRAs, etc.)
- Substantially low LTV (my favorite...)
I DID find this from Sal Trump - (EzineArticles.com) that said...
"The self employed face a logistical obstacle when applying for a mortgage. They deduct business expenses on their tax returns in order to have a low net income, which saves them money at tax time, but their mortgage lender uses that net income figure to determine their annual income. The bookkeeping discrepancy can make the self employed borrower appear to have a low income and high expenses, even if the situation is just the opposite. The best candidates for a self employed mortgage have great credit, little consumer debt, two or three years of audited financial records, and cash to use for a down payment. There are, however, many cases in which all of these stars do not align. Self employed borrowers are considered high risk by lenders because their income can vary widely from month to month, and because income can't be accurately estimated into the future."...
Sounds like a sequel in the works for Kurt Vonnegut Jr's 'Catch-22'!