Dee Dee Jones Real Estate Blog: September 2009

One of the biggest casualties of the current tightening of mortgage guidelines has been Self-Employed Borrowers.  This month, I've had two applications that I've had to turn down for lack of income even though each of these applicants was generating thousands of dollars in "revenue" each month.  The reason the applications were turned down was because too much of their income was written off on their tax returns.

Even though the write-off's were a legitimate and legal way to reduce their tax liabilities, they also left too little bottom-line income to qualify for a mortgage loan.  In the past, these applicants' loans would have been approved using one of the less-stringent loan programs.  But today those "less-stringent" programs no longer exist - so these folks can't qualify for a mortgage anymore.

You may insert your own personal value judgment here about whether this is good or bad for our economy or the housing markets and whether it is fair or unfair.  I mention it because it is a major change in lending and self-employed borrowers need to be aware that if they are trying to buy a home in the future, they will need to prove 2 years' worth of satisfactory "bottom-line" income to qualify.

But rumors circulating around right now also raise another concern for self-employed borrowers: 

With the government buying up massive amounts of mortgage loans through Fannie Mae & Freddie Mac purchases - funded by the recent "Stimulus" packages - word is that the IRS (another arm of the government) is starting to compare the loan applicant information with tax return information.  Until recently, Fannie & Freddie were not government-run organizations, but now that they ARE, will they be freely sharing data with the IRS?

"How can you afford to pay a mortgage payment that is higher than your income?"

Let's say your loan was purchased by Fannie Mae and your mortgage payment is $3,000 a month.  What happens if the IRS cross-references your tax return info with your loan application info and discovers that, after all your write off's, you are claiming less than $3,000 a month in income?  The logical question is then, "How can you afford to pay a mortgage payment that is higher than your income?"  Will this trigger an Audit?  Many insiders are suggesting that soon it will.

Is this a bad thing for the IRS to do?  Probably not.  This could be an effective way for them to root out tax cheats, under-the-table earners who aren't paying their fair share of taxes, and even possibly find terrorists and drug dealers.  But it will also cause extra hardship on individuals who have lost their jobs or their businesses are down and they have been making their payments from savings.

In reality, if this policy does go into affect, it'll probably be like them red light runner ticket cameras:  If you're not running red lights, you have nothing to worry about, but I can't help feeling like my privacy is being invaded every time I drive through those intersections.