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A TOUGH SELL

If you're an independent contractor or your income comes from bonuses, commissions or non-traditional sources, you might have to work a little harder than the traditional borrower to sell yourself to a home mortgage lender.

Mortgage bankers don't look at you in quite the same way if you don't collect a regular paycheck every week.

Getting a mortgage is often tougher, costlier and more time-consuming for the self-employed and those whose income varies from year to year.

"You have got to sell, sell, sell yourself, then you have to sell yourself again" to get a mortgage, said Dan Byrne, a Tampa entrepreneur who just sold his four Dunkin' Donuts stores in Hillsborough County and plans to buy some Dairy Queens.

Lenders tend to feel more secure lending money to people who work for companies that provide a regular paycheck. It makes it easier for them to calculate how likely the mortgage is to get paid and how much they can safely lend.

The trouble is, fewer and fewer people fit into that category. As companies shrink and technology makes it easier to work from home, more people have become independent contractors. That often means their income is irregular.

Getting a mortgage has always been more difficult for entrepreneurs, doctors, lawyers, people who get paid in commissions and bonuses and people whose income comes from non-traditional sources such as real estate and the stock market.

"You would not believe how many people don't fall in the normal (lending) guidelines," said Barbara J. Bailey, an agent for one of Coldwell Banker's Tampa offices. "A lot of these people have assets, stocks and bonds, that don't show on a tax return."

The self-employed can still get loans, of course. But they often have to put more money down on a house and pay higher interest rates.

Sometimes the self-employed can get the same interest rate as people who receive regular paychecks from an employer if they are willing to show the lender two years' worth of tax returns. But that may not be assurance enough if the borrower does not have a sufficient track record in a new line of work or with a new enterprise.

Even those who have been self-employed for a while and have had decent income may be reluctant to show their tax returns because it might not impress the lender.

The same deductions they use to keep their income taxes low can make their income levels look skimpy. While lenders are supposed to add back in some of the business deductions to determine real income, the numbers still may look low.

"This is really hard for some people to handle," said Scot Segesman of East Lake Mortgage. "If they decide to save money on taxes by declaring all these expenses, then they deserve to qualify for less house. If they are not willing to do that, they are going to have to pay a higher rate."

The solution for some may come in the way of "low-documentation" or "no-documentation" loans, which do not require as much evidence of income.

"You can get a loan without giving me the world," said T. Donnell Smith, executive vice president of Clearwater-based Market Street Mortgage.

Another type of loan many self-employed people consider is a "stated income loan." That means borrowers say what their income is and don't have to prove it.

"Be cautious of stated income loans," advises Andy Wood of First Home Mortgage in Largo.

Often lenders require borrowers with such mortgages to sign an IRS form that allows them to pull tax returns in the future. If your stated income turns out to be higher than the income on the tax returns, the borrower could foreclose on the house. Worse, if the federal government finds out the tax return could be wrong, an audit and criminal charges could follow.

Plus, these types of loans tend to cost more.

"The feature of those kinds of loans is that you paper over the paper with money," said Keith Gumbinger of HSH Associates, a financial publisher that keeps track of mortgage trends and forecasts. "You have to put more money down than a normal person would be required to and the interest rates and fees are higher."

You also often have to have more money in the bank. Instead of having a reserve of two house payments in your bank account after the deal is done, you may be required to put aside six months' or more, Wood said.

How much higher the interest rate will be and how much you will have to put down on the home depends on how good your credit is. That is decided by a computer program, which spits out a number called a FICO score, or a credit score. The computer uses special programs to calculate how likely you are to repay debt. It reportedly takes into account how you have handled credit in the past and how much debt you have or have access to in the form of credit cards. Only the people who program the computers really know what goes into calculating credit scores and what weight different items are given.

"If the credit score is over 680, they may allow them to do stated income (loans), but if it is below 620, they are pretty much out of luck," said Segesman of East Lake Mortgage.

Different lenders offer different loans that might fit the needs of these non-traditional borrowers. Consumer experts say to shop around. Mortgage brokers say one reason to go to them rather than a bank is because they are familiar with a variety of programs from a variety of lenders.

Entrepreneur Byrne knew he needed a special type of loan to buy his wife a house in Tampa Palms for their 25th anniversary. He had just sold his businesses and had not bought the new ones yet. His business history would be considered irrelevant even though he had proceeds from those sales, and his future business history was in doubt.

Still, Cendant Mortgage agreed to lend him the money he needed with little hassle because he has good credit. For a loan with no income verification requirement, he had to put 40 percent down and pay an interest rate about a point above the going rate.

In the end, he didn't buy the new house, because he hadn't sold his current home and needed the proceeds to make the down payment on the second house. The seller would not wait the few days it took Byrne to arrange for a temporary "bridge" loan.

Byrne is optimistic that anyone with some selling ability should be able to talk a lender into giving them some type of a mortgage.

"If a person can sell themselves across the table to get a job, they can sell themselves to get a mortgage."

Up next:HOUSE VALUES

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