December 11th, 2014 5:35 PM by Richard T. Cirelli
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
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 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
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.