Getting a Mortgage Loan When Self-Employed

Reader Question: I have a zero credit score. Everything I own is paid for, including my mobile home. I was approved for a mortgage loan in June 2008, but a week later I lost my job. I am now self-employed. The lenders I have spoken with now say I have to be self-employed for two years before they can look at me for a mortgage loan. Is there any way I can get a mortgage without waiting two years?

What you are hearing from some lenders (in regards to self-employed borrowers trying to get mortgage loans) may in fact be true. One of the top two criteria lenders use when reviewing a mortgage application are credit and income. Since you do not have a stellar credit score in your favor, chances are that any lender willing to seriously consider your application will be looking for solid proof of income. This is where being newly self-employed becomes a factor.

In the past, mortgage lenders were willing to make loans based on stated income -- if a borrower had stellar credit and was willing to make a large down payment and pay a higher interest rate. But during our most recent housing boom, these loans were somewhat misused and commonly became known as "liar's loans." They got this nickname because borrowers were not required to prove their income and often inflated it. Most financial institutions have eliminated these types of loans entirely, and Fannie Mae and Freddie Mac have also discontinued their stated-income mortgage loan program for self-employed borrowers.

Because you do not have a W2 from an employer to prove your income (being self-employed and all), the lender will rely solely on the past two years tax returns for the business. And this brings us up to where you are stuck. Your best bet would be to work on raising your credit score so you can work your way from zero up to a really good score. This will help you immensely when the current credit freeze passes and lenders start to loosen up their mortgage lending criteria.

You can also start a fund to save money for the down payment when you are finally approved for a mortgage loan, because you may be required to put down 20%-40% due to your self-employed status.

Hope that helps you out some. Good luck, and happy holidays!