Return to
list of stories

Return to
Managing Your Money

Return to
Business Front

Bringing Home a Loan
Self-employed workers find getting a mortgage is a trying and often costly experience

By Kenneth Lelen
(c) The Washington Post
Saturday, March 9 1996; Page E01

When Rebecca and Blair Bostick sold one Alexandria house and bought another nearby, they didn't expect the problems Rebecca's home-based business would cause.

"I had a hard time convincing my agent that my office, an 11-by-11 foot room off the back of my old house, wasn't going to be made presentable every time someone wanted to see it," said Bostick, 35, who designs home and school additions in her six-year-old architectural practice.

More nettlesome were the Bosticks's loan applications and contacts with mortgage brokers. While Blair Bostick, 37, a salaried employee, only had to show his W-2 wage statements, Rebecca Bostick was required to present four years of tax returns, three years of business projections, wage receipts from a previous employer and copies of signed contracts for upcoming work from two school-renovation clients.

"I was amazed at what the bank made me do," Bostick said. "I had to prove myself to the mortgage broker, who kept saying, `You've only been in business four years.' "

Like a growing number of self-employed people, Rebecca Bostick thinks buying and selling homes, obtaining mortgages and refinancing loans are more difficult, risky and costly for her than for salaried workers. And mortgage rates for self-employed business people are higher than loans offered to salaried employees, while new homes with built-in offices are more costly than conventional units of the same size.

What's more, according to self-employed business operators, they resent the intense scrutiny of their assets and incomes when applying for mortgages.

Loan officers acknowledge that the demand for proof of continued employment is the thorniest issue in the mortgage application process for self-employed business operators, who make up 7 percent of the 5.5 million wage earners living in Virginia, Maryland and the District.

"The issue for the lender, however, is determining [a borrower's] chances of continued success," said Herndon mortgage banker Bill Korby, branch manager for Columbia National Mortgage Corp. "You're only seeing it more often because of all the layoffs in the job market and the rise of many home-based businesses."

Other roadblocks to loan approval include lack of contracts from current clients, insufficient down payments, less than six months of mortgage reserve funds and insufficient time as an independent contractor or self-employed business operator.

"We need to see two to three years of self-employed income to strike an average," Korby said. "If they've just become self-employed, that person will have to wait."

The region's newest home-based business people and self-employed workers are vulnerable to the demands of mortgage and real estate professionals, said Beverly Williams, president of the American Association of Home-Based Business, a Rockville nonprofit group with more than 800 members in 26 local chapters nationwide.

"It is difficult for people starting out to learn how to deal with these issues," she said. "They don't have the training to think out the consequences of these demands."

Self-employed borrowers may have small net incomes because deductible expenses reduce their incomes, even though they often have enough assets to qualify for mortgages, said Fairfax loan officer Pam Stevenson.

"They are extremely successful people who don't want anybody to see their tax returns, so we flip them into mortgages with a 20 or 25 percent down payment and no income verification," Stevenson said. "We can see cash moving through their checking accounts and perfect credit reports."

Because they expect growth in the number of self-employed people, lenders are eagerly offering no-income-verification mortgages. Such loans require nontraditional borrowers to demonstrate creditworthiness and verify assets, but do not require them to document their income.

"All they have to do to avoid income verification is show sufficient assets, good credit and at least a 20 percent down payment," said Towson loan officer Robert Cole. "The hitch, of course, is interest rates on such loans are one-half percent to three-quarters percent above conventional, market-rate loans."

In some cases, lenders require self-employed borrowers to sign IRS Form 4506, which enables the lender to audit the borrower's tax returns after the settlement.

"A 4506 is typically used to verify income for borrowers of no-income mortgages," said Rockville mortgage broker Bill Rozek. "If a significant discrepancy shows up, the lender can call the loan."

The Form 4506 requirement is distasteful to many self-employed business people, who are used to managing their own financial affairs in privacy. Lenders, however, are prepared to deal with reluctant borrowers.

"If a borrower won't sign a 4506, that's no problem," said Korby. "We just require a fully documented loan application."

Though an easy process for most homeowners, mortgage refinancing has become a nightmare to self-employed people looking to lower monthly bills or extract capital from their home equity. People who were salaried for 15 years and recently became self-employed will have problems refinancing a mortgage, Stevenson said.

"They may be worried about getting today's low rates," she said. "But they're more disappointed when we tell them they have to wait because they don't have the two-year track record of self-employment."

Nevertheless, self-employed business people pay a premium to refinance a mortgage, said Patrick Kane, 60, who has operated a planning consultancy for 12 years from the finished garage of his Reston home. Three years ago, when refinancing a $240,000 mortgage, the process was lengthened because of the high interest rates he encountered.

"One lender offered me an atrocious deal at an exorbitant rate -- 10.5 percent," and an origination fee of 3 percent, he said. "Ultimately, I got an 8.5 percent loan at a time when squeaky-clean [conventional] borrowers were getting 7.5 percent."

Because mortgage lending is a "churn-oriented business that offers commodity products, it's the price you have to pay when you're self-employed," Kane said.

Some self-employed people may have had bad experiences buying and selling real estate or obtaining mortgages, said Stevenson, but they should not be discouraged because the mortgage market has changed in the last two to three years.

"Loan officers are more flexible and their staffs more experienced at handling self-employed borrowers," she said. "Borrowers should ask for a loan officer who specializes in handling loans for the self-employed."