Home Buying Still in the Cards for Many Self-Employed Americans, Bills.com CEO Stroh Says

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Five things self-employed individuals must know to get a home mortgage loan.

This year's mortgage industry shakeup left one group scratching its collective head, with self-employed individuals wondering if they still can qualify for a mortgage, according to Brad Stroh, co-founder and co-CEO of free online consumer portal Bills.com (http://www.bills.com).

"Self-employed Americans are wondering how loans available to them have changed -- and what they can do in this new landscape," Stroh noted.

The subprime crisis stemmed from lenders providing too many loans to buyers with less-than-optimal credit who were unable to make the payments. Stroh explained, "Home buyers struggled when the property they bought was too expensive, they did not take all costs into account when calculating ability to pay, or their adjustable-rate mortgage (ARM) payments escalated too quickly for income to keep up."

Whether an individual qualifies for a "prime" or "subprime" mortgage is determined by the credit score. Credit scores incorporate credit history, amount of credit available and used, number of late and on-time payments and whether any payments due are in default.

Credit scores range between 300 and 850. Higher numbers indicate better credit, or a greater likelihood of repaying debt. The median U.S. credit score is about 725. A score below 680 usually results in a borrower being charged a higher interest rate, falling into an Alt-A or subprime market, or being denied credit. Alt-A is a categorization for borrowers who pose greater risk to lenders than do prime borrowers, but less risk than true subprime borrowers.

"In response to the high level of home foreclosures and mortgage defaults, the mortgage industry has clamped down on 'easy' or risky loans," Stroh said. "In the past, many self-employed people have been able to qualify for mortgages using alternative documentation, stated income or 'no doc' (documentation) applications. These loans are often categorized as Alt-A loans. Today, self-employed individuals are wondering whether it will be more difficult now to qualify for a mortgage. It is still possible -- by understanding a few key points."

1. Credit is king: For self-employed people, credit scores will be more important than ever. In the past, Alt-A loans were available to self-employed individuals with a credit score of 620 to 640. Today, most lenders require a higher score of 660 to 680.

2. Not-so-low down payments: In addition, other loan requirements have become more stringent. Just a few months ago, borrowers could have put nothing down on a home. Today, most lenders will only allow Alt-A loans of 80 percent to 90 percent of the home purchase price. This means self-employed borrowers must make a down payment of 10 percent to 20 percent.

3. Credit check. "If it has been a while since you reviewed your credit report, take a look," Stroh cautioned. Everyone is entitled to one free credit report copy per year. Visit http://www.annualcreditreport.com to request yours. "Review it closely," advised Stroh. "If you notice any errors, write to the credit reporting bureau and request that the errors be corrected."

4. Debt matters: When people are in the market for a home, their total monthly debt load matters a great deal. Debt ratio -- or percentage of debt to income -- affects the total loan amount for which a buyer qualifies. Many lenders require borrowers to have a total debt ratio of 38 percent or less, meaning no more than 38 percent of gross income is going toward debt payments. This includes all debt, including mortgage, auto loans, student loans, personal loans and credit card bills. "If you can pay off some debt, you will free up more room in your debt ratio for a mortgage payment, thus allowing a higher monthly payment to be considered affordable," Stroh said.

5. Boost your score. Credit scores are not built in a day, but you can improve the score, Stroh suggested. First, pay every bill on time. Second, pay down credit card debt -- the bigger the gap between balances and limits, the better. Third, do use credit cards, especially the oldest cards you hold, occasionally. Small charges that you pay off immediately can improve your score. Fourth, ask for a break -- if you have never made a late payment, but you find you miss one deadline, ask the company to erase the late payment.

"With some care and planning, buying a home is still in the cards for most self-employed Americans," Stroh said. "Reaching the American dream just might require a little more preparation than it has during the past decade -- and of course, a larger down payment."

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at http://www.bills.com/blog. Since 2002, Bills.com has served more than 30,000 customers nationwide while managing more than $500 million in consumer debt. Bills.com is a division of Freedom Financial Network, LLC, whose co-founders and CEOs, Andrew Housser and Brad Stroh, have been named Northern California finalists in Ernst & Young's Entrepreneur of the Year Awards.

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