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LoanBud’s Self-Employed Mortgage Survey Analysis

Owning a home is a dream for many people, but if you are self-employed, it can be difficult for you to secure a mortgage. Regardless of if you are a W-2 employee or self-employed, a mortgage lender will look at the same things: your credit score, debt, income, and assets. When you are a W-2 employee, verifying your income is easy, you just give the loan officer your check stubs and bank statements, but when you are self-employed, you need more than that to prove that your income is stable. Sometimes, a self-employed person will be given a pre-approval letter for a mortgage and then be turned down in underwriting, which can cause the sale to fall through and potentially make them lose their earnest money deposit. This is why LoanBud decided to conduct a study of self-employed people who have tried to get a mortgage loan in the last seven years. Here, we will take a look at the results.

Summary of the Self-Employed Mortgage Survey

LoanBud surveyed 521 self-employed people who have tried to obtain a mortgage loan in the last seven years, all of whom are in the United States. Of these people, 32.44% were between the ages of 25 and 34; 32.25% were between the ages of 35 and 44; 18.81% were between 45 and 54; and 16.51% were 55 or older. The respondents made up of 52.98% male and 47.02% female. We asked them several questions about obtaining a mortgage loan, including if they were approved or denied, and at what point in the process; and if they struggled to get a mortgage because of their tax returns.

What is considered self-employed for a mortgage loan?

The self-employed survey respondents include small business owners, freelancers, contractors, or gig workers. As the gig economy grows, there will be more self-employed people aspiring to buy their own homes, so gaining a better understanding of how the mortgage industry works for the self-employed is important. A mortgage lender will typically consider you to be self-employed if you:

  • Own 25 percent or more of a business
  • Receive 1099 tax forms
  • Do not receive W-2 tax forms
  • Are a freelancer or independent contractor
  • Get at least 25 percent of your income from self-employment

This means that if you are a part-owner of a small business, but you own less than 25 percent of it, a lender may not consider you self-employed. If you have a small side hustle, like driving for Uber occasionally or selling some handmade items out of your home, but less than 25 percent of your income comes from these sources, and you have an income from a source that pays you as a W-2 employee, you may not be considered self-employed for the purpose of determining if you qualify for a mortgage loan. In fact, in those cases, if you make enough from your W-2 job to qualify for the mortgage loan alone, according to the lending rules from Fannie Mae and Freddie Mac, you are not required to include that income in your application. However, including that income information may help you qualify for a bigger mortgage loan than you might with just your W-2 income alone.

Reason for Conducting the Survey

LoanBud is a national lender designed to meet the needs of the growing community of business owners, freelancers, and entrepreneurs. We have known that our self-employed customers have experienced issues with obtaining a mortgage and wanted to further examine these issues by analyzing the results of a survey. In many cases, when a borrower receives a pre-approval letter from a lender, their income is not typically analyzed or sent to an underwriter upfront. It can be challenging for those in the mortgage industry to properly calculate and determine the qualifying income that can be used for a self-employed applicant, particularly if the supporting documentation has not been sent to an underwriter. Often times, it is only after a self-employed home buyer's bid on a home has been selected, and the buyer is under contract, that the loan application is sent to an underwriter. Unfortunately, there remains a relatively high degree of risk that the application could be denied, and there is little to no recourse that a buyer has with the pre-approval issuing lender. We conducted this survey to gain a better understanding of where in the loan process self-employed people have the most trouble.

Survey Method

LoanBud worked with the market research platform Pollfish to conduct the market research. Pollfish works to weed out any fraudulent survey responses and gets organizations like LoanBud the accurate, quality data they need.

Survey Questions & Results

We asked the respondents a total of five questions about when and where they had trouble getting approved for a mortgage loan. Let’s take a look at the results for each of the questions.

1) Did you have difficulty getting approved for the mortgage because of your tax returns?

For a W-2 employee, tax returns tend to be more straightforward compared to a self-employed individual. Since most lenders still require tax returns to qualify self-employed borrowers, they may run into issues as the underwriter will only qualify the application based on the "net" income after all expenses, deductions, and write-offs.  Since most self-employed people will take every measure possible to reduce their taxable income, many could then encounter difficulties with getting a mortgage based on their tax returns. Of the 521 people we surveyed, 52.98%, or 276 people, said they have difficulty getting approved for their tax returns; 245 people, or 47.02%, said they did not encounter any trouble because of their tax returns.

2) Did you consider writing-off less tax deductions to show more income to get approved for the mortgage?

Mortgage lenders traditionally only count taxable income when determining if you qualify for a loan. If you are self-employed, you probably take as many tax deductions as you can get because it can reduce your tax bill. The problem is that these tax deductions lower your taxable income, so lenders may think that the borrower does not make enough money to qualify for a mortgage. For this reason, if a self-employed person is planning on buying a house in the next year or two, they might be tempted to write off fewer tax deductions to have more taxable income to help them get approved for a mortgage loan. Of our survey respondents, 53.17%— 277 people — considered writing off fewer deductions, while 46.83%— 244 people — did not.

3) Did you wish the lender offered other ways to qualify your income besides using tax returns?

Since the traditional way to get approved for a mortgage is based on your tax returns, many banks will only look at that for a self-employed person, even though their finances work a little bit differently. If you get denied based on your tax returns alone, and the mortgage lender does not offer other ways for you to prove your income is steady and sustainable, then you are left with no real options. This is especially hard if you get the pre-approval first and the lender did not thoroughly analyze your income beforehand, and the underwriter denies the loan application. At that point, you can be in a difficult position with the home buying process. This is why we asked our survey respondents if they wished there was another way the lender would look at their income. Of our respondents, 62.57% said yes, while only 37.43% of them said no.

4) Were you given a pre-approval letter and later denied for the mortgage?

Calculating your income as a self-employed person can be difficult for you and for a loan officer. If you are applying online for a mortgage loan, as is common these days, you have to figure it all out yourself and make sure it is entered correctly on the application. The lender will look at your tax returns for the last two years, do a cash flow analysis, and analyze your profit and loss statements. Many lenders, particularly those with online applications that produce instant pre-approval letters without ever speaking with a real person, which can be problematic for a business owner, freelancer or entrepreneur. When a self-employed home buyer completes an application online, they will enter what they believe their income to be, which may be a very different figure than what the underwriter calculates. Because of this, the buyer may have received an instant pre-approval letter without anyone ever analyzing the tax returns, profit and loss statements, and any other financial documents that must be provided. Getting this instant pre-approval can do much more harm than good since it can lead you to being denied the loan or qualifying for a loan that is not enough money for the home you are now contracted to buy. This is such a problem that 50.29% of our respondents reported being denied the mortgage after being pre-approved.

5) Were you happy with the experience you had with the lender?

Since the mortgage process is complex and can be time-consuming, the final question we had for our respondents was if they were happy with the experience that they had with their mortgage lender. Of our respondents, 54.89% said that yes, they were happy with the experience; 45.11% said they were unhappy, which is only a little less than those who were given pre-approval letters and then denied the mortgage.

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Conclusions From Survey Results

After analyzing our survey results, LoanBud confirmed its beliefs that the mortgage industry is truly not built for self-employed people, and that there is a great need for a mortgage lender that understands the complexities of their income. Since other banks will not fully review your tax information upfront or give you other ways to qualify your income that do not require you to avoid tax deductions to have more taxable income, it is no wonder that over half of the survey respondents were pre-approved and then later denied their mortgage loans.

LoanBud realized how badly a lender was needed for self-employed people who want to buy homes, so we created a system that will thoroughly review tax returns and other financial documents upfront instead of jumping straight to the pre-approval. If we determine the tax returns are not enough, we offer other ways to qualify, including using 1099s or bank statements, so that the self-employed home buyer can have an accurate pre-approval before they enter into a contract to purchase a home.

COVID-19 and Self-Employed Mortgage Loans

While the survey did not look at the self-employed attempting to get a mortgage loan specifically during the height of the COVID-19 pandemic, many banks are scrutinizing self-employed applicants even more than before. Lenders want to know that they are still operating and making healthy profits, so lenders might require even more documentation to prove that the pandemic has not negatively impacted their business. Bigger banks also may have even stricter requirements than before, like the need for a specific number of mortgage payments in savings in case something impacts your self-employed income.

The relationship between the COVID-19 pandemic and self-employed prospective home buyers securing loans is something that could be explored further in a future study, but for the purposes of this survey, the first two years of the pandemic were included in the seven-year timeframe.

Final Thoughts

If you have a profitable small business or make excellent profits being self-employed on your own, do not let the big box banks’ misunderstanding of self-employed income stop you from seeking out your dream. LoanBud is here to help the self-employed obtain mortgage loans without offering the false promise of unanalyzed pre-approvals. You will not need to calculate your income on your own either because our experts are trained on doing just that to ensure accuracy for your potential loan approval.

LoanBud will allow you to use 12-24 months of bank statements if your tax information is not enough for you to qualify for a mortgage loan. Unlike other banks, LoanBud also does not require you to have been operating for at least two years before you can qualify for a mortgage. The two-year minimum is a barrier for many self-employed people who are seeking a mortgage, especially since other lenders are rigid in this requirement. LoanBud takes this on a case-by-case basis, looking at your previous work history and experience, in addition to other financial information, so you may not be stuck waiting for two years before you qualify.

If you are self-employed and looking to purchase a home, instead of wasting time with other banks who may pre-approve you now just to deny you later, contact LoanBud today. We are the mortgage lender that is designed to work with the self-employed, so our experts understand how to evaluate you on your unique income information.

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