Self-Employed Borrowers Face Uphill Mortgage Battle

Borrowers who are self-employed encounter several challenges when trying to receive a home loan, despite having higher incomes than those who are not self-employed, according to a new Zillow (NASDAQ: Z) Mortgage analysis. 

From a database of nearly two million loan requests per month, Zillow calculated the average self-reported income, home value and credit score for mortgage shoppers on Zillow who reported being self-employed and compared these values to home shoppers who did not report being self-employed. 

While lenders use a variety of methods to determine whether they want to quote a loan request, for many self-employed borrowers, credit score appeared to be a primary factor hampering their access to a mortgage.

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Self-employed mortgage shoppers are about twice as likely as non-self-employed prospective borrowers to report a FICO score below 680, Zillow reports, noting about 47% of self-employed shoppers have reported credit scores below 720, while just 28% have scores below 680. 

The median U.S. credit score was 692 in April 2014, according to myFICO, however, lenders recommend a credit score of at least 740 to get the best mortgage interest rates. As for those who aren’t self-employed, just 23% have self-reported credit scores below 720, while 14% have scores below 680. 

“Self-employed borrowers will no doubt face headwinds when trying to get a loan. Low credit scores coupled with a mountain of paperwork lenders must complete specifically for self-employed borrowers, make them unattractive,” said Zillow Vice President of Mortgages Erin Lantz.

Even as loan amounts, incomes and down payments have trended up for self-employed borrowers, the number of loan quotes given to them has trended down.

Today, self-employed borrowers receive six loan quotes for every 10 received by non-self-employed borrowers, according to Zillow data as of October 31, 2014. In 2011, these borrowers received seven loan quotes for every 10 received by their non-self-employed counterparts.

Not only did self-employed borrowers report higher household incomes ($145,000 vs. $80,000), but they also requested loan quotes on more expensive homes.

The median property value for mortgage requests on Zillow made by self-employed borrowers is $352,000, while the median value request for non-self-employed borrowers is $315,000.

“So, despite self-employed borrowers with high incomes appearing on paper to be better situated to repay their loan, they’re often overlooked by lenders,” Lantz said. “In cases like this, it really pays to shop around.” 

Written by Jason Oliva

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