Credit is Hard to Find for Self-Employed and Small Business Owners

Small business owners are having a hard time getting stated income loans.

Stated income loans have nearly disappeared from the credit market after catching the “liar’s loan” nickname and taking the blame for many mortgage defaults. Self-employed workers and small business owners, two groups who traditionally use that kind of loan, are being hit hard by the constriction. Where credit histories and earnings estimates used to be a way to get around W-2’s or other documentation, now the best option can be to submit 2 years of tax returns and cross your fingers.

With a lot of cash, credit scores of 700+, and two years of running a profit, loans are still available. But even when a stated income loan can be found, the interest rates are 0.25% higher than conventional loans and down payments are often over 30%.

And sometimes adapting to tax challenges can hurt loan possibilities- Many are running into problems by taking larger business deductions to lower their tax liabilities. It means a lower official income level, and that means a lower chance of getting a loan. And the problem is exacerbated for people who have started their own businesses recently. For the thousands who were laid off by their companies and hired back as consultants or on contract it can be difficult to show long-term earnings for their business.

The New York Times quotes a guideline scenario from Debra Killian, president of Charter Oak Lending in Danbury, Connecticut:

“If a business owner shows too little net income to qualify, say, for a $300,000 mortgage at 5%, and instead qualifies for a 5.25% loan, the monthly payments add up to an extra $5,520, roughly, for the first 10 years of the more expensive loan.”

If you’re a small business owner looking at a loan in the next few years, it’s better to pay the taxes now and get a better percentage on your loan. From every angle, though, there is no denying that small business owners are getting the brunt of the credit crisis.

Photo Credit: SashiBellamkonda

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