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Life Events, Mortgage

How to Get a Mortgage When You’re Self-Employed

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Self-employment has a lot of perks. Trading the long commutes, cubicles, and endless meetings for a more flexible, location independent lifestyle can feel like a major upgrade. And who wouldn’t love swapping business casual for pajamas?

It’s been reported half to two-thirds of Millennials find the idea of entrepreneurship very attractive. And can we blame them? They’ve witnessed their parents’ job instability, decreasing company loyalty, and the lingering wounds of The Great Recession. Working for yourself seems like a no-brainer when considering these discouraging realities. But self-employment isn’t always so simple.

Despite the many benefits, self-employed workers often struggle to secure a mortgage due to strict regulations, more tax deductions, higher debt-to-income ratios, and lower credit scores.

Scrutiny From Fannie and Freddie

Qualifying for a mortgage is never easy, but the underwriting process is even more complicated for America’s 15 million self-employed workers. It becomes an even bigger headache when it involves government-backed mortgage giants Fannie Mae and Freddie Mac.

Fannie Mae requires lenders to analyze the stability of a borrower’s income, their type of the business and where it’s located, the demand for their products and services, the business’ overall financial health, and its projected revenue for the future. Also, lenders must review a two-year history of the borrower’s earnings.

Freddie Mac follows a similar process to verify a self-employed borrower’s income. This includes analyzing the borrower’s experience in their industry, identifying reasons for significant increases or decreases in income, and even proof the business exists from a third party.

The Consumer Financial Protection Bureau responded to the financial crisis by creating the ability-to-repay rule. Its purpose? To ensure borrowers can actually afford their loans. A qualified mortgage can only be approved if a borrower has met the ability-to-repay guidelines. This type of loan protects borrowers from predatory lending practices and lenders from potential lawsuits if the borrower has trouble repaying. Lenders like qualified mortgages because they can be resold to Fannie Mae and Freddie Mac, freeing up cash for additional loans.

[Learn more about Fannie Mae’s Frequently Asked Underwriting Questions here.]

How Tax Deductions Can Hurt

Being self-employed can be incredibly expensive and the massive tax burden only adds to the challenge. Fortunately, many workers can reduce their liabilities by lowering their taxable income. How is this accomplished? Tax deductions. Deductions can include a variety of business expenses including home office, transportation, equipment, education, and more. Although this may amount to significant annual savings, it may cause difficulties when applying for a mortgage.

Did you know lenders evaluate the income of salaried or hourly workers differently than self-employed? Traditional workers are evaluated on gross income, but self-employed borrowers have to report their net income on mortgage applications.

Self-employed workers typically claim as many deductions as possible and these deductions significantly lower the worker’s taxable income. This creates an incomplete picture of the borrower’s past and future earning ability. By claiming these tax deductions, the borrower may be unknowingly creating a roadblock on the path to a mortgage.

Debt-To-Income Ratio is Critical

A lower net income impacts the most important factor in being qualified for a mortgage – the borrower’s debt-to-income ratio. The self-employed worker’s debt-to-income ratio is calculated by averaging net income from their two most recent tax returns and the year-to-date income and expenses. A borrower’s debt-to-income ratio can be no higher than 43% to be approved for a qualified mortgage.

If you’re planning to buy a home within the next two years, you may want to consider reducing or eliminating tax deductions until after you’ve been approved for a mortgage. A certified public accountant can help you weigh the pros and cons. Also, they can help reduce net income by amending a tax return.

Some lenders have more experience underwriting mortgages for the self-employed. Finding a knowledgeable loan officer who’s able to analyze tax returns and the business’ financial statements can make a huge difference. Remember, a low debt-to-income ratio may help create wiggle room for other challenging areas of the underwriting process.

Self-Employed Workers Have Lower Credit Scores

Most of us understand the importance of a strong credit score, but many are confused about how it affects the mortgage underwriting process.

A recent Zillow study found that despite earning higher incomes, self-employed borrowers receive 40 percent fewer loan quotes from lenders. Why? Lower credit scores. The study cites self-employed borrowers are twice as likely to have a credit score below 680. This less than optimal credit score coupled with massive amounts of paperwork make self-employed borrowers less attractive to lenders.

A lower credit score can also make a mortgage more expensive. The best mortgage rates and terms are offered to borrowers with a FICO score of 740 or higher. So, what’s the best method of defense? Advanced preparation. Arm yourself with knowledge by reviewing your FICO credit score, disputing any errors you find, and then researching the lowest interest rates.

Think Creatively To Accomplish Your Goal

If you’re still struggling to be approved, you may need to think creatively to meet your goal.

How much home do you really need? Evaluating needs vs. wants is important and may lead to a property you’re more likely to qualify for. Avoid properties with mandatory homeowner association fees (HOA) because this expense gets lumped into the overall mortgage calculation.

How much have you saved for a down payment? Parting with the extra cash may make you cringe, but a larger sum reduces the size of the loan and may make it easier to qualify for.

If you’re still having trouble, there’s nothing wrong with finding a trusted partner to cosign the loan. Together, your combined income may close the qualifying debt-to-income ratio gap and earn approval on your must-have loan.

Securing a mortgage when you’re self-employed isn’t easy, but it’s possible. Preparing yourself for the challenges of Fannie and Freddie’s strict regulations, the disadvantages of tax deductions, higher debt-to-income ratios, and lower credit scores will give you the best possible chance of being approved for a mortgage and moving into your new home.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Mortgage

How to Host a Successful Garage Sale

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Whether you’re prepping for a move or finally cleaning out the basement, decluttering your home can bring you peace of mind — and extra cash. Hosting a garage sale is a great way to get rid of old or unused items. Here are a few tips to help you make your sale as profitable as possible.

When is the right time for a garage sale?

Garage sales go by many names — yard sale, moving sale, tag sale, estate sale or rummage sale — but some portion of the event will likely take place outside. If you’re hosting your sale to get rid of stuff before a move, you’ll likely be stuck to a certain date, but if you have some flexibility, consider mild seasons like spring or fall. No one likes rummaging through old items in the blazing August sun, even for good deals.

How to prepare for a yard sale

While the concept of a garage sale is fairly simple, it’s easy to mess up. Many people who host a sale see little success — often because they failed to prepare. Sure, you can just set your unwanted items out on the lawn and have passersby stop and quickly sift through everything. But when you put in a little work ahead of time, the success of your sale is much greater.

“The more preparation that you can do, the more you’ll probably make,” said Ava Seavey, New York-based garage sale expert and author of Ava’s Guide to Garage Sale Gold.

Schedule wisely. First, you’ll want to pick a day for your sale, ideally a Friday or Saturday.  Then you’ll want to take the time to sort through your belongings and carefully select the items you want to sell, choosing items that people will actually find appealing and will want to buy.

Be strategic about prices. Seavey advised that costume jewelry, furniture and collectibles have the potential to make sellers the most money. However, how you price the items is key to ensuring you will earn what these items are worth.

“A good percentage of people who go to garage sales will pay what you have written down,” Seavey said. While some people will negotiate, if your stuff is priced correctly, people will pay it, she said.

Get the word out. You will also want to focus on advertising your sale in your local newspaper and online using garage sale-specific websites and social media channels. Go ahead and describe the types of items you’ll have for sale to attract the right customers.

Be prepared. You’ll want to make sure you have all the supplies you need, including:

  1. Tables
  2. Tablecloths
  3. Pricing labels
  4. Money apron (to hold cash)
  5. Bags
  6. Paper/newspaper (to wrap fragile items)
  7. Signs (to advertise the sale throughout the neighborhood)
  8. Notebook/ledger (to keep track of items sold and money collected)

This may seem like a lot to do in order to sell a few necklaces, purses or electronics. But this preparation can make your sale more appealing and profitable. If having your own sale sounds too time consuming to prepare, you and a friend, family member or neighbor could have the sale together.

What to expect during your garage sale

On the day of the garage sale, you’ll get a variety of customers depending on what you have available for purchase. If you have advertised correctly and have the right things for sale, you could draw in a large crowd.

“I would have plenty of things for everyone. Those are the best sales, when you have a variety,” Seavey said.

Try to keep the sale going from the morning to the late afternoon. Having a sale that lasts a few hours may hinder your ability to make money because you are limiting how many people will be able to come. If your sale starts in the morning and goes until later in afternoon, you can maximize the profits from the sale because those who could not make it during the morning hours can shop in the afternoon before the sale ends.

“There is no magic time to end, but you will do most of your selling in the morning,” Seavey said. “I like to go as long as I can.”

With the money you make from your sale, you can add to or start an emergency fund, pay past-due bills, or even purchase updated items for your new home if you are moving.

What to do after the yard sale

A successful yard sale will leave a lot of money in your pocket and very few unsold items on your lawn. Consider storing your newly acquired cash in an online savings account that earns you interest. If you’re stuck with leftover items, you can always hold another sale, or you can donate them to a charity, church or secondhand store. You won’t make any money when you go this route, but there are benefits to donating.

“You have unloaded everything, you’ve made some money and you have a tax write-off,” Seavey said. “It’s a win-win-win for everybody.”

A garage sale can be the answer when you want to rid yourself of unwanted items — and even make a little money in the process.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kristina Byas
Kristina Byas |

Kristina Byas is a writer at MagnifyMoney. You can email Kristina here

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What the End of HARP Means for Your Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Home values have been on the mend since the financial meltdown of just a decade ago. This has been good news for people who have struggled with negative equity in their homes, meaning the value is lower than the amount they owe on their mortgage.

The percentage of “underwater” homes has dropped significantly, decreasing 16% year over year at the end of 2018 to comprise 4.1% of all mortgaged properties, real estate research firm CoreLogic found. But that means there are still homeowners who need assistance with recovering their equity.A popular government-sponsored refinancing program aimed at helping these homeowners has recently ended, and people looking for help getting above water may not be aware of the other options they have.

In this article, we highlight and explain what the closing of HARP means for homeowners and several available alternatives.

What is HARP?

The Home Affordable Refinance Program, known as HARP for short, is an initiative that helped underwater homeowners refinance their mortgage. The program was introduced in 2009 after the housing crisis.

HARP allowed eligible homeowners to refinance their mortgages to lower their mortgage interest rate or switch from an adjustable-rate to a fixed-rate mortgage even if they were underwater. Typically, lenders will not allow a borrower to refinance if the house is worth less than what is owed.

In order to qualify, homeowners needed to meet the following requirements:

  • No late mortgage payments over the last six months that were 30-plus days behind, and no more than one late payment over the last year.
  • The mortgage you’re attempting to refinance must be for your primary residence, a one-unit second home or a one- to four-unit investment property.
  • Your mortgage must be owned by Fannie Mae or Freddie Mac.
  • Your mortgage was originated on or before May 31, 2009.
  • Your loan-to-value ratio is more than 80%.

The program had been extended a few times, but the last HARP deadline was Dec. 31, 2018.

Fannie and Freddie’s HARP replacements

Government-sponsored enterprises Fannie Mae and Freddie Mac have refinance products in place that are meant to replace HARP.

Fannie Mae’s High Loan-to-Value Refinance Option

Beginning on Nov. 1, 2018, Fannie Mae has offered a high loan-to-value refinance option to borrowers with mortgages owned by the government-sponsored entity. The product is meant to make refinancing possible for borrowers who are maintaining on-time mortgage payments but have an LTV ratio that exceeds the amount allowed for standard refinance options.

Borrowers must benefit from the refinance through a reduction in their monthly principal and interest payment, a lower mortgage interest rate, shorter loan term or by switching to a fixed-rate mortgage. There is no maximum LTV ratio for fixed-rate mortgages; however, the maximum LTV for adjustable-rate mortgages is 105%.

The eligibility requirements include:

  • The loan being refinanced must be an existing Fannie Mae-owned mortgage.
  • The loan must have been originated on or after Oct. 1, 2017.
  • At least 15 months must pass between the loan origination of the existing mortgage and the refinanced mortgage.
  • Borrowers must be current on their mortgage, have no late payments over the last six months and only one 30-day delinquency over the last 12 months. Delinquencies longer than 30 days aren’t permitted.
  • The existing mortgage can’t be a Fannie Mae DU Refi Plus or Fannie Mae Refi Plus mortgage.

Freddie Mac’s Enhanced Relief Refinance Mortgage

Freddie Mac offers the Enhanced Relief Refinance mortgage to borrowers who are current on their mortgage but can’t qualify for a standard refinance because of a high LTV ratio. The mortgage being refinanced must meet the following requirements:

  • The mortgage must be owned or securitized by Freddie Mac.
  • The mortgage can’t have any 30-day delinquencies over the past six months and only one 30-day delinquency in the last year.
  • The closing date for the mortgage was on or after Oct. 1, 2017.
  • The mortgage can’t already be a Relief Refinance mortgage.
  • There should be at least 15 months between when the original loan was closed and the refinanced loan’s origination.
  • The loan can’t be subject to an outstanding repurchase request.
  • The maximum loan-to-value ratio for adjustable-rate mortgages is 105% and there’s no max for fixed-rate mortgages.

Borrower benefits include a lower interest rate, switching from an adjustable-rate to fixed-rate mortgage, shorter mortgage term or lower monthly principal and interest payment.

Alternatives to refinancing when you’re underwater

If refinancing your mortgage doesn’t sound like the best move for you, consider one of the following alternatives.

Mortgage modification

A mortgage modification is a way to change the original terms of your loan without going through the refinancing process. In some cases, you can work with your lender to switch from an adjustable-rate to a fixed-rate mortgage, extend your loan term, lower your interest rate or add past-due amounts to your unpaid principal balance.

Modifying a mortgage could be beneficial for homeowners facing hardship who aren’t eligible to refinance and are delinquent on their mortgage payments or expect they will eventually fall behind.

Mortgage recasting

If you have a lump sum of at least $5,000 in cash, you could potentially recast your mortgage. A mortgage recasting results in lower monthly mortgage payments. You pay a lump sum of cash to your lender to reduce your outstanding loan principal amount, then your loan is reamortized based on the lower remaining principal balance. Your interest rate and loan term stay the same.

This option makes sense if you’re expecting a bonus from your employer, a large income tax refund or some other financial windfall.

The bottom line

Although HARP has come to an end, there are still options for mortgage borrowers with Fannie- or Freddie-owned loans. In order to qualify for the enterprises’ refinancing programs, it’s helpful to maintain on-time payments even when your loan amount exceeds your home’s value.

If you don’t qualify, be sure to strategize on how best to attack your mortgage balance and rebuild equity. Consider making extra mortgage payments whenever possible by freeing up room in your budget, earning extra income or dedicating unexpected money to your mission.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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