Buying a home has never been a one-size-fits-all process. While traditional mortgage programs work well for many borrowers, today’s workforce and financial landscape look very different than they did even a decade ago. More Americans are self-employed, own businesses, work as independent contractors, receive income from multiple sources, or have financial situations that don’t fit neatly into traditional lending guidelines.
That doesn’t necessarily mean they can’t qualify for a mortgage. It may simply mean they need to approach financing differently. According to mortgage professional Daryle Pellegrino, a Mortgage Loan Originator with Absolute Home Mortgage Corporation, one of the biggest mistakes prospective homebuyers make is assuming that being declined by one lender means they cannot buy a home.
“The first question shouldn’t always be whether someone fits into a traditional mortgage box,” Pellegrino explains. “The better question is whether there’s another legitimate way to document the borrower’s ability to repay the loan.” Understanding those alternatives can make a significant difference for buyers whose financial profiles aren’t traditional.
Why Traditional Mortgages Don’t Work for Everyone
Traditional mortgage underwriting generally relies heavily on documented income, credit history, assets, debt obligations and other financial information. For a salaried employee receiving a predictable W-2 paycheck, documenting income can be relatively straightforward. For business owners and self-employed borrowers, the picture can be considerably more complicated.
A successful business owner, for example, may legally use deductions to reduce taxable income. While those deductions can be beneficial at tax time, the resulting tax return may not accurately reflect the amount of cash flow available to the borrower. That can create an unusual situation: someone may operate a successful business, maintain significant assets and comfortably afford a home, yet have difficulty qualifying under traditional mortgage calculations.
Alternative Ways of Documenting Income
The mortgage industry has developed programs designed for borrowers whose finances don’t fit conventional documentation methods. Depending upon the borrower, loan program and property, lenders may be able to evaluate financial strength using documentation other than the traditional approach.
Bank statement programs are one example. Instead of relying exclusively on tax returns, certain programs may analyze deposits appearing on personal or business bank statements over a specified period to help determine qualifying income. Other programs may consider assets, investment income, rental-property cash flow or other permissible methods of documenting a borrower’s ability to repay.
These programs aren’t shortcuts around mortgage underwriting. Borrowers still need to satisfy the requirements of the particular loan program. The difference is the way their financial situation is evaluated.
Self-Employed Borrowers Need a Different Conversation
For entrepreneurs and business owners, preparing for a mortgage can sometimes be as important as applying for one. That’s because business finances, personal finances, tax planning and mortgage qualification can intersect.
A borrower who waits until after finding a house to examine these issues may discover a problem at the worst possible time. Working through the numbers earlier can help identify potential obstacles before a purchase contract and closing deadline are involved.
This is an area in which Daryle Pellegrino frequently works with borrowers whose income or financial circumstances require a more detailed analysis than a standard mortgage application. Rather than assuming a borrower qualifies—or doesn’t qualify—the objective is to understand the entire financial picture and determine which available mortgage programs may appropriately fit that situation.
A Mortgage Decline Isn’t Always the End of the Story
Mortgage guidelines vary. A borrower who doesn’t satisfy the requirements of one lender or loan program may potentially satisfy the requirements of another. That’s particularly important when dealing with circumstances such as self-employment, complex income, recent credit events, substantial assets, investment properties or borrowers who don’t have a traditional income profile.
The reason for a mortgage denial therefore matters. If the fundamental issue is that the borrower cannot reasonably support the proposed mortgage payment, another program isn’t going to magically solve the problem. But if the issue involves the way income was documented or a guideline specific to one particular program, additional options may be worth examining.
That distinction can prevent otherwise qualified borrowers from unnecessarily abandoning their plans to purchase a home.
Real Estate Investors Have Different Financing Needs
Real estate investors represent another group whose financing needs may differ from those of traditional owner-occupied homebuyers. An investor purchasing a rental property may be particularly interested in the property’s potential rental income and cash flow.
Certain investment-property loan programs can place significant emphasis on the economics of the property itself when evaluating the transaction. This can be useful for investors building portfolios or borrowers whose personal tax returns don’t tell the complete story of their financial position. Again, the appropriate financing structure depends upon the borrower, property and specific loan program.
Planning Before Shopping for a Home
One of the most useful things a prospective buyer can do is examine financing before becoming emotionally attached to a particular property. A mortgage review can reveal issues involving credit, income documentation, available assets or the proposed down payment.
More importantly, discovering those issues early creates time to address them. Sometimes the solution is relatively simple. In other situations, the borrower may need several months to position themselves properly. Either way, knowing beforehand is preferable to discovering the problem days before closing.
The Mortgage Market Is Bigger Than Many Consumers Realize
Consumers frequently think of mortgages as a handful of familiar options: conventional, FHA, VA and jumbo loans. Those programs represent an important part of the mortgage market, but they aren’t the entire market. Additional financing programs exist for borrowers with different financial circumstances and property types.
The important point isn’t that every borrower will qualify for an alternative program. It’s that borrowers shouldn’t automatically assume that one lender’s answer represents every possible answer. A knowledgeable mortgage professional can evaluate the complete situation and determine which programs are actually available and appropriate.
The Bottom Line
Today’s homebuyers earn money in increasingly different ways. Mortgage financing has evolved alongside those changes. Traditional mortgages remain an excellent solution for millions of borrowers, but business owners, self-employed professionals, real estate investors and borrowers with complex financial situations may require a different approach.
For prospective buyers who have been told they don’t fit traditional mortgage guidelines, getting a second evaluation may reveal options they didn’t know existed.
Daryle Pellegrino is a Mortgage Loan Originator with Absolute Home Mortgage Corporation, NMLS #327220. He works with homebuyers, homeowners, self-employed borrowers and real estate investors to evaluate mortgage financing options based on their individual financial circumstances.
