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It’s no secret that traditional mortgage companies can get a little nervous about lending to homebuyers with so-called “non-traditional” finances. But the reality is, not every qualified and creditworthy homebuyer has a steady W2 job and a pile of cash on hand for a 20% down payment.
In fact, many home buyers have strong credit and more than enough money to afford a home, yet still struggle when it comes to qualifying for a mortgage because of their complex financial situations.
Frankly, it’s a problem across the mortgage industry, which hasn’t been very nimble when it comes to underwriting loans for creditworthy buyers who, for example, are self-employed or change jobs frequently.
Here are four types of homebuyers that struggle to get a mortgage, despite being creditworthy:
1. Self-employed buyers
According to a recent report from Freshbooks, there will be a whopping 42 million Americans self-employed by 2020.
There’s a common misconception that being self-employed means having no income stability. But in practice, self-employed workers often have more job security than traditional W-2 employees.
If you’re self-employed, and you lose one contract or client, you likely still have others to buffer your income. Still, lenders tend to be more comfortable dealing with W-2 employees than a prospective home buyer who has stacks of 1099s.
In most scenarios, if you’re self-employed, mortgage lenders will want to see financial documents that prove you’ve been earning a steady income in your self-employed position for a minimum of two years.
This can be problematic because you may be in a financial position to buy now, and don’t want to wait two years while housing prices and interest rates go up. Plus, during that time you’re losing out on the chance to build equity.
2. Small business owners
Much like self-employed borrowers, traditional lenders want to examine two years of tax returns from small business owners.
You may also be asked for a profit and loss statement to prove your business plan isn’t a flash in the pan, but rather is providing you a consistent revenue stream.
Also, a common problem for small business owners is their tax deductions often bring down the income requirements they need to qualify for home loans.
3. Contract employees
Some high-paying careers require changing employers frequently because of the nature and scope of work.
For example, it’s common for skilled IT workers to have government contract roles or be brought onboard with companies to complete specific projects that have short timelines. Sometimes, these contracts may last just a few months to a year.
Even though these careers have strong demand in the marketplace and employees may continuously have jobs lined up after contracts wrap up, a traditional lender may see the frequent changes in employers as a risk factor.
4. Buyers with high assets, low income
Maybe you have an investment portfolio that performed well. Or, you were able to save a sizeable chunk of money from your last career. Perhaps you’ve built an impressive amount of equity in your starter home.
Meanwhile, you took a break from the traditional workforce — whether that was to travel, take care of a family member, or you simply wanted a break before launching into your next career.
Traditional lenders will likely have a hard time overlooking the gap in employment, even if you have strong assets and a proven track record in the workforce.
Header Image Source: (Patrick Chin/ Death to the Stock Photo)