Self-employed individuals are finding it more and more difficult to obtain mortgage loans in today’s economic climate. High credit scores are no longer enough to guarantee success.

As lenders require more and more verification of income, those without an employer and a W-2 form to present must show proof in other ways. Under new regulations, mortgage brokers are required to verify existence of the business by contacting an independent third party, such as a tax accountant, a regulatory agency, or the applicable licensing bureau. Their records must include how they gained contact information, the name of the person they spoke with, and their position.

Next, they must verify a telephone listing and address for the business by consulting telephone books, directory assistance, and/or the Internet. This research must also be documented in their loan files. This could present a problem for individuals who operate a business from their own homes, and those whose entire business is conducted over the internet or “on site” without benefit of a storefront.

In addition, mortgage brokers must obtain a copy of every individual’s income tax records and keep that information in the loan file.

Previously, borrowers were required to sign an IRS form giving the mortgage lender permission to obtain IRS records, and the lender could decide if or when to submit the form to obtain tax information.

Under new Fannie Mae guidelines effective September 1, the lender is required to obtain a signed Form 4606-T from all borrowers both at application and at closing. They then “recommend” that lenders obtain the tax transcripts prior to closing and use them to validate the income documentation used during the underwriting process.

This is the biggest hurdle for the self employed. After spending years carefully studying tax regulations and learning of every possible tax deduction, many very successful self-employed individuals appear to have hardly any income.

In the past, mortgage lenders were able to overlook certain expenses such as deductions for a home office and certain depreciation and add them back into the borrower’s income. This may no longer be the case, so self-employed individuals are being encouraged to be less aggressive in finding deductions.

Along with setting up a roadblock for the self-employed, this new regulation adds paperwork for the mortgage lender. Files are selected at random for quality control reviews, and those files must include the executing and reconciliation of the transcript information with the income documents in the loan file.

Author:Marte Cliff
CreditScoreQuick.com your resource for free credit reports, credit cards, loans, and ground breaking credit news.

This entry was posted on Wednesday, September 16th, 2009 at 1:03 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.