Some Lenders Shy Away from Self-Employed Borrowers

Mortgage & Real Estate









Self-employed borrowers generally have higher incomes than salaried workers but they tend to be treated as second-class citizens when applying for a mortgage due to their low credit scores.

That’s what Zillow found in comparing loan quotes for salaried or hourly workers with the quotes received by entrepreneurs. Salaried workers that use Zillow’s website generally get 10 quotes from lenders for every six quotes self-employed borrowers receive.

“Credit availability is still a challenge and it is particularly challenging for self-employed borrowers,” said Zillow vice president Erin Lantz. “So, despite self-employed borrowers with high incomes appearing on paper to be better situated to repay the loan, they’re often overlooked by lenders,” she said in a press release issued Thursday.

The self-employed customers that use Zillow’s website have an average household income of $145,000 compared to $80,000 for the other borrowers. And the median property value for mortgage requests by the self-employed is $352,000 compared to $315,000 for the other borrowers. Even so, most of these entrepreneurs are not shopping for jumbo loans.

Zillow’s analysis shows while entrepreneur borrowers have a higher income and are seeking a larger loan, their credit scores are lower. “Self-employed mortgage shoppers are about twice as likely as non-self-employed shoppers to report a FICO score below 680,” according to the press release. This probably reflects the ups and downs of running a business that can ding a person’s credit score.

But Zillow’s analysis also found that self-employed persons have experienced rising household incomes over the past two years, which is not true of other prospective borrowers who visit Zillow’s website.

“We are seeing that their income is up 28% since the summer of 2012,” Lantz said, while the income for non-self-employed borrowers is down by 17%.

Some lenders still shy from entrepreneurs because they know how complicated it is to underwrite a loan for such borrowers, especially one with a low credit score. They also know how much work it takes to move that application all the way to the closing table, Lantz said in an interview.

That is why it’s important to “shop around and have a complete conversation with a lender,” she added.

Based in Seattle, Zillow gets 2 million loan requests every month.

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