You don’t
have to tell anyone who is self-employed that there are extra costs that go
with the benefits. In addition to the long hours and weight of responsibility
that come with the job description, getting a home loan has always added
special challenges. Now that we are into the new Dodd-Frank era of federal
oversight, some of the changes warrant an early heads-up.
The 2010
legislation that went into effect on January 10 created the Consumer Financial
Protection Bureau, with the function of tightening the rules lenders follow in
order to discourage the issuing of mortgages that borrowers can’t be reasonably
expected to be able to repay. To deliver on that worthy purpose, more proof and
more paperwork will be required to support the income claimed on loan
applications (here you might well be hearing an imaginary smacking sound from self-employed persons reading this and whacking
their foreheads—paperwork is the bane of the self-employed).
If you are
your own boss and getting a loan in New Orleans is on your horizon, take heart!
Just because it may be more difficult to apply for home loan doesn’t mean it’s
impossible.
The new
lending rules describe eight specific factors lenders should verify and
document before advancing home loans. They includes the borrower’s assets,
credit history, employment status and other debt obligations. The penalty for lenders
who fail to do so adequately is that they may be legally liable if a borrower proves
unable to repay.
For the
self-employed, the extra burden can come with the requirement that borrowers be
able to show consistent income (hear that forehead-smacking sound again?) The
general rule is that borrowers be able to provide at least two years’ worth of
personal tax returns. Since self-employed people getting a loan in New Orleans often
have perfectly valid reasons for fluctuating annual incomes, it’s vital to talk with a broker and lender as early as
possible to establish the taxable income level needed to qualify for a
loan.
That talk
should cover other areas. For instance, self-employed people have greater
flexibility than most when it comes to reporting deductible expenses on their
income tax forms. Since those same deductions result in lower net incomes, that
can be problematical when it comes to getting a loan. One way to counter that
problem is to demonstrate that the expenses incurred were used to buy things
that will improve their business in the long term. Another approach is demonstrate
that similar expenses are not likely to re-occur (particularly apt when a
business is just starting up).
If you are among the self-employed—and plan on getting
a loan—planning is key. Get your ducks
in a row now so the loan process doesn’t derail you later. It’s never too early
to call me as an early resource before we get to move on to the fun stuff—your
home search!
Terez Harris NOLA Real Estate Group
(504)297-2619
Harris.Terez@gmail.com
Keller Williams Realty New Orleans 8601 Leake Ave. New Orleans, LA 70118 504-862-0100
Each office independently owned and operated. All brokers licensed in the state of Louisiana.
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