You bust your hump every day. You bring valuable goods and services to your town. You create jobs in a dismal economy. You are the entrepreneur, the small business owner, the self-employed. And how do mortgage lenders repay you for all your contributions to your community? All too often, like Col. Jessep (Jack Nicholson) being grilled by Lt. Kaffee (Tom Cruise) in the movie “A Few Good Men” (“Is the colonel’s underwear a matter of national security?”).
According to the U.S. Department of Labor, small, non-farm based businesses constitute 99.7% of all employers, employ 52% of the private workforce and account for 51% of the nation’s sales. Yet it seems much easier for one of your employees to obtain a mortgage than for you. An “employed” person can show up with four pieces of paper in their hand and get approved for a loan in less than an hour. Meanwhile, the “self employed” borrower (who has made personal sacrifice after personal sacrifice to keep people employed) may feel like they have to show up with a wheelbarrow full of paperwork like they’re going to an IRS audit, provide a blood sample and wait two months before the loan processor even acknowledges that they exist. What gives?
“What you want. Baby I got. What you need. Do you know, I got it? All I’m askin’ is for a little respect when you come home.” (Aretha Franklin)
The major problem is that earning streams and cash flows of small businesses are often sporadic and unpredictable. In addition, the past five years have been riddled with challenging economic times in which many small businesses have seen declining profits. Couple this with significantly higher default rates of the “No Documentation” loans that were prevalent over the previous decade – many of which were made to self-employed borrowers – and you can start to understand why underwriters look at self-employed borrowers (from an analytical standpoint that is) like they would Charlie Sheen on an episode of “The Jerry Springer Show.”
Fortunately, I can tell you it isn’t all bad news for the entrepreneur. The fact is, banks that specialize in small business tend to have a much better understanding of cash flows, balance sheets and write-offs/deductions that tend to make profits look smaller than what they really are. So my first recommendation for a self-employed borrower is to work with a local bank that has an understanding of their business.
Second, while the days of “No Documentation” programs have come to an end, there are still some lenders who offer reduced income documentation methods for self-employed borrowers in an attempt to streamline the process. For example, the Susquehanna Self Employed program cuts down on paperwork and simplifies the mortgage evaluation process (we joke that we save two trees with every mortgage application taken using this program!). It is available for purchases, refinances and even construction-permanent loans, for loan amounts up to $2,000,000. Heck, you can even use the program to purchase a vacation home.
“When the world is running down, you make the best of what’s still around.” (The Police)
So to all you entrepreneurs out there looking to buy, build or refinance a home, have no fear. Find a bank that understands the dynamics of your business and a program that fits your needs, and if it was meant to be, it will happen.
Finally, as we approach Labor Day, I want to take a moment to say thank you for all that you do to keep on fueling the economy!