RTC Mortgage Blog

WHY SELF-EMPLOYED BORRWERS GET TURNED DOWN?

I’ve come across a few published articles on this subject lately. And the more I think about it, the more I realize that it doesn’t have to be that way.

Why is it that self-employed borrowers get turned down more often than salaried borrowers?

First, let’s examine the facts…………………

According to a recent survey by Zillow, self-employed borrowers generally have higher incomes than salaried workers but they have more difficulty qualifying for a mortgage. Judging by the number of people that contact me after being denied a loan elsewhere, I don’t dispute this fact.

Zillow also reported that salaried workers that use their website generally get 10 responses from lenders for every six responses self-employed borrowers receive, adding credibility to the fact that self-employed borrowers get turned down more.

It’s not due to income. The self-employed customers that use Zillow's website have an average household income of $145,000 compared to $80,000 for the other borrowers. And the median property value for mortgage requests by the self-employed is only slightly higher at $352,000 compared to $315,000 for the other borrowers. Furthermore, Zillow's analysis also found that self-employed persons have experienced rising household incomes up 28% over the past two years, while salaried borrowers who visit Zillow's website are up only 17%.

From these statistics you would think that self-employed borrowers with higher incomes are better-qualified than salaried borrowers yet, they are turned down more often.

The Answer:

The short answer is that many loan officers, processors and underwriters just don’t know what they are doing when it comes to self-employed borrowers! It’s much easier to process and underwrite a loan for a salaried, employed worker than it is for a self-employed business owner.

To process and underwrite a self-employed borrower it takes a lot more training, knowledge, and expertise. In most cases minimum of two years personal and business tax returns plus a Year-To-Date Profit & Loss Statement must be analyzed. And, many self-employed borrowers own more than business. There could be Partnerships or partial ownership in multiple businesses too. Tax returns will be required for each entity in which the borrower owns 25% or more. A thorough knowledge of tax return analysis is required to know which sources of income can be used to qualify, whether certain expenses can be added to or deducted from the borrower’s income, etc. And in most cases the income must be averaged over a two-year period. 

Next, if the loan officer, processor and underwriter aren’t properly trained and don’t work with self-employed borrowers on a regular basis, they won’t likely have the expertise to properly analyze the income and arrive at the proper figures to qualify the borrower. A self-employed file takes much more work than a salaried workers file.

Another factor is that bigger banks and mortgage lenders tend to centralize their processing and underwriting services in distant locations where their staff has no direct contact with the borrower. Accordingly, there is no personal relationship or rapport established with the borrower.

Much of my business is referred to me after someone has had their application declined elsewhere. And the majority of the time I am able to obtain an approval where others have failed. Being located in a high-priced market where the majority of my applicants are self-employed requires me and my staff to have a thorough knowledge of tax return analysis and lenders underwriting guidelines.

Providing experienced and local customer service is the key to getting the self-employed applicant approved.