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Tightening home mortgage rules hitting self-employed hardest

Original post made on May 14, 2008

In a blow to hundreds—probably thousands—of breadwinners in Pleasanton who successfully operate their own businesses, the housing credit crunch is causing lending institutions to significantly curb issuing home mortgages to those who try to qualify by using "stated incomes" without business-provided W-2 Internal Revenue Service forms to document their income.

Read the full story here Web Link posted Wednesday, May 14, 2008, 11:30 AM

Comments (13)

Posted by Homeowner, a resident of Ironwood
on May 14, 2008 at 12:44 pm

Being required to have "all your ducks in a row" to qualify for a mortgage obligation of hundreds of thousands of dollars isn't a bad thing...


Posted by Really Now, a resident of another community
on May 14, 2008 at 6:09 pm

Tightening home mortgage rules hitting self-employed hardest?? I thought those foreclosed upon with no where else to go where it hardest. Typical P-town Weekly spin.


Posted by Rick, a resident of Vintage Hills Elementary School
on May 14, 2008 at 7:20 pm

The banks are run by knuckleads. First he loan to unqualified borrowers, now, they overcorrect and won't lend to succesfull entrepenuers...... Whatever...


Posted by Really Now, a resident of another community
on May 15, 2008 at 8:00 am

Rick -- Awesome post and very much factual.

Thank you for sharing.


Posted by Drexl, a resident of Ironwood
on May 15, 2008 at 4:12 pm

This is funny. Why? If they stated income that is high, the true self employed, but now asked to prove that they actually made that income, they just have to provide tax return; obviously they under reported their income and did not pay their fair share of tax. So now what? Punishment, pay higher interest when your mortgage interest rate adjust. I love it, unfair, I call it justice!


Posted by allthefacts, a resident of Amador Valley High School
on May 16, 2008 at 10:38 am

Stated income loans are not just about income, but also assets. Many who are retired and live off of substantial investment accounts etc... do not have high incomes but do have substantial net worth. Unfortunately lenders have always tried to oversimplify the process to capialize on hot markets. Some of the most qualified borrowers are being denied loans because banks percieve they can't afford a mortgage. The reality is exactly the opposite.

Just like Enron, the S&L crisis and now the sub-prime mortgage industry, the corporate execs who promoted bad business and ran thier companies into the ground are long gone and likely got big bonuses to leave. The people that remain are attempting to pick up the pieces to help the business survive. Niether approach leads to a healthy business long term.


Posted by Drexl, a resident of Ironwood
on May 16, 2008 at 10:51 am

A lot of people have a lot of net worth here in pleasanton because of the equity in their homes; that does not mean they can afford a mortgage. Mortgage requires liquid assets; so if your net worth is from realestate, you are going to subsiside your low cash flow by equity loans? That's not good. Okay, well maybe your assets are more liquid like stock; this is very tricky, because if you are using stock assets that you sell of, as a retiree would, then you still would have reportable income in the form of capital gains from previous years. Okay, one more step, we now say current house paid off, no need to sell stock, want bigger house and need mortgage; and you want to use your assets almost like "collateral"; well, for this, I would go to brokerage firm like Morgan Stanley where you would have your assets so they see that at any time, you can pay your obligation; if you have third party loan, and stock goes down because you made huge mistake, how are they too know you can now pay? If I was in loan business, and people had huge assets, ok, need to give a substantial down payment, at least 25%; then maybe pass it off; even then, might ask higher. This whole business of tightening loans and everyone blaming others....one thing I don't want to happen, is to have MY TAX dollars going out to bail these companies and homeowners who are "walking away" from their mortgages... their mistake, their loss.


Posted by George Duarte, a resident of Livermore
on May 16, 2008 at 3:55 pm

Some interesting comments on the "stated income" loan above
- This loan program has been around since the early 80's, invented by World Savings on adjustable rate loans only. These loans were specifically designed for self-employed borrowers. The underwriting guidelines included good credit, 6 months proven cash reserves (by bank statements), proof of self employment (business license or CPA letter), and a minimum of 20% and usually 25% down payment. Under these guidelines, these loans historically had a very low delinquency ratio,great performance and profitability to the bank.
This loan was not designed to enable people to cheat on their taxes or hide their income from anyone, rather, the underwriting and documentation guidelines for self employed people by FNMA and FHLMC are quite complex, and qualify the borrower on net income off the 1040 schedule C- literally, the bottom line. Most frequently people had a large gross income, but after deductions for costs of goods sold and others, the bottom line would look very anemic, and insufficient to qualify for a decent loan amount.
This loan program is still a valuable real estate financing tool, that if returned to its original parameters,will again prove to be a stable, prudent and profitable loan program for lenders.


Posted by frank, a resident of Pleasanton Heights
on May 16, 2008 at 7:27 pm

Our friend Drexi, obviously a W-2 employee, does not seem to relate to real world. He states:

"This is funny. Why? If they stated income that is high, the true self employed, but now asked to prove that they actually made that income, they just have to provide tax return; obviously they under reported their income and did not pay their fair share of tax."

Has he ever heard of Form 1099? He will when his job is out-sourced to India/China and he becomes an independent contractor!!!! Everyone is the U. S. is staring Schedule C in the face for their future!!!! Many just don't yet know it.


Posted by Drexl, a resident of Ironwood
on May 16, 2008 at 7:44 pm

Frank- are you telling me that 1099 can not be used proof of income? 1099 is not a big deal, ok, so you end up paying the employer fica yourself, no biggie, it is still proof of income; especially since the company that paid you reported it to the irs. That being the case, I do not thing 1099 employees would have any more issues attaining a loan today than 5 years ago; unless I am completely missing something here..if so, explain...


Posted by frank, a resident of Pleasanton Heights
on May 16, 2008 at 8:22 pm

I am responding to Drexi's claim about self-employed:

"obviously they under reported their income and did not pay their fair share of tax"

Before a company will issue you payment for an invoice, whether you are a self-employed individual or a company selling a product, they will require a Taxpayer Identification Number. Often they send you a W-9 form to fill out and submit. For a self-employed individual, aka a Form 1099 independent contractor, the social security number (SSN) is supplied as the TIN. Company's will use their FEIN, which stands for Federal Employer Indentification Number. If you refuse to supply a TIN, the payer is required by law to backup withhold 20 percent of the payment and send it to the IRS at the end of the year.

Now each year the payer must send Form 1099 to each Form 1099 recipient by the end of January, just like the W-2 that employees receive. Meanwhile, the payer must also send in Form 1093 to the government(usually a March deadline), whereby this form lists all of the Form 1099s sent out and their corresponding amounts.

Bottom line. As a self-employed individual you had better report your Schedule C income (mostly Form 1099 income) or ELSE the IRS will come a-calling!!!!

Maybe if you are a waiter, massage therapist, or housekeeper who receives cash payments, then you can escape paying taxes on this income. But those whose "stated income that is high, the true self employed", have a hard time cheating on their 1040.

So, the real world is that the self-employed that we are talking about in this thread do not and can not easily cheat on their taxes. Their income is determined by their tax filings for the purposes of a lender, not an inquiry to an employer about what their salary is. Been there and done all of the above.

Since many many more of you out there are destined to become the "self-employed" through globalization and the policies of your national elected officials (you have yourself to blame on this point), it is best you get educated on these details.....



Posted by Stacey, a resident of Amberwood/Wood Meadows
on May 16, 2008 at 9:36 pm

No 1099 if the employer is foreign...


Posted by drexl, a resident of Ironwood
on May 16, 2008 at 10:49 pm

What about shopkeepers? landscapers? electricians, almost all trade businesses deal with cash/checks. You don't think they offer deals to pay in cash? I always ask how much if I pay cash, and they always give me a break as to paid by check. Now, don't get me wrong definitely a lot of 1099 out here especially in tech; but I don't think the article applies to them as obviously they have no problems issuing tax records as you stated in your post. Interestng topic, surprised to read it here and that it would have such high impact...as i go back to my original post about tax evation...irs;; their biggest loss of revenue; is not high deductions, but underreported income.... my question to any of you, when you were young, had a condo, and rented a room out for extra cash; who reported that cash to the irs? unfotunately when i was younger i did not..my wife did when we met, and i was very impressed..she reported full rent for the room in her condo...she was not happy that i didn't as well...like i said...i was naive and just complanied about paying taxes, i still complain as to how much we have to pay, so it really upsets me when we end up bailing people out of foreclosures with our tax dollars..ok..i am definitely all worked up on this whole mortgage "meltdown" as reeported all over the news....


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