Manulife has rescinded a promotional offer it had been offering consumers of a record-low five-year mortgage rate after Finance Minister Jim Flaherty indicated his displeasure with the lender’s decision. On Tuesday, Manulife Bank dropped its posted interest rate for a five-year fixed-rate mortgage to 2.89 per cent. That’s the lowest posted rate for that time frame the company has ever offered. But in an about-face later in the day, the company pulled the offering and reverted to its former rate above three per cent.
Mortgage lenders have tightened requirements across the board in the wake of the housing crisis, but now—even as the workforce increasingly moves away from traditional 9-to-5 employment—self-employed borrowers have a tougher time securing a mortgage. It’s an issue felt by many, as the Small Business Administration reported that the number of Americans who were self-employed approached 9.9 million in the second quarter of 2012.
- “Everybody has a higher burden of documentation,” says Joe Parsons, managing partner of PFS Funding, a small mortgage banker in Dublin, Calif. “For self-employed borrowers, what used to be the godsend was stated income loans.”
- In a stated income loan prior to the housing crisis, the lender did not verify the borrower’s income using tax returns or W-2s. Nowadays, though, most mortgage lenders want to see at least two years of a self-employed borrower’s Schedule C, the tax form that reports income or loss from a business. If income increases between year one and year two, the lender averages the two. If the second year’s income is lower, the lender will use that number. People who individually operate multiple companies will usually need to provide two years of tax returns for each company in which they own 25 percent or more—potentially creating paperwork headaches.
- Documenting the source of funds for a down payment can add additional stress. “Any deposits more than about $400 or 500, if they are not clearly identified as to their source, they will need a paper trail,” says Parsons. “Many self-employed borrowers who use their business and personal accounts interchangeably or they have cash from a brick-and-mortar business [encounter problems because] they cannot document acceptably.”
- The real kicker: Mortgage eligibility is based on net income, meaning all those business deductions actually count against the borrower. “Self-employed borrowers try to write off as many expenses as they can, but that tactic may hurt them when securing a loan,” says Patrick Ruffner, vice president of mortgage lending at Guaranteed Rate, an independent mortgage company based in Chicago.
- One exception is depreciation on business-related purchases, which can be added back into the borrower’s net income to help them qualify. “Let’s say you have a car that you have purchased for your business. You can write off some depreciation. It’s a paper loss, not a cash loss, so whatever you’re claiming for depreciation can be added into your net income,” Ruffner says.
While lecturing their southern neighbors about frugality, the Dutch have run up the highest rate of mortgage debt in Europe. Their borrowing, fueled by generous tax breaks and subprime-style lending practices, now totals 107 percent of the country’s gross domestic product, more than twice the European average of 50 percent. “It’s one of the big scandals of Dutch policy,” says Rick van der Ploeg, an Oxford university economist and former Dutch cabinet minister. “The government has encouraged reckless financial speculation.
- No one worried much about the situation so long as housing prices kept rising—as they did for more than two decades, until 2008. Since then, though, they’ve slid 16 percent, pushing almost one-fourth of mortgages under water. Royal BAM, the country’s biggest homebuilder, expects the decline to continue for another 2 or 3 years, for a total drop of up to 30 percent. Such a scenario would rival Spain’s real estate collapse.
- The debt load is already putting strains on the economy. Highly leveraged households have trimmed their consumer spending, helping to push the country into recession. Dutch GDP is forecast to contract 0.5 percent this year, the worst performance of any northern European country. “The high stock of mortgage debt is among today’s biggest vulnerabilities of the Dutch economy,” Klaas Knot, the country’s central bank chief, said in an Oct. 15 speech.
yet another “Dutch Disease”? :)