Q: After going through a pre-approval process and then being approved for a refinance loan, we received a lock in rate and submitted all kinds of paperwork.
The paperwork included our last 2 years’ worth of tax returns. Although our loan was initially approved due to our high credit score and good credit report, ultimately, the lender denied our application due to “excessive business losses in 2003” and “excessive deductions in 2004.”
Is this normal?
A: It may be. It’s possible that if you have so many business deductions your income dropped to nearly zero then it would be difficult for the lender to approve you for the loan. After all, how would you pay it back?
But if you and your spouse are self-employed or have certain businesses that create these deductions and losses on your income tax returns, you may want to work with a mortgage lender who specializes in providing loans to people like yourself, with businesses or self-employed.
The process for approving self-employed individuals is a bit different than for someone who is an employee. Mortgage lenders who work with business people and self-employed entrepreneurs look for different things on a tax return. They understand that your deductions aren’t necessarily eating up all of the income you have for food, housing and utility bills.
I encourage you to find a lender like this.
You might also want to try a “no doc” loan. With a no-doc loan, the lender would look at your credit score to make a decision about whether or not to fund your loan and verify other information without looking at your documentation. If your credit score is good – and it sounds as if it is – then you would be approved for the loan without being required to provide additional paperwork.
The cost for a no-doc loan might be another quarter to half a percentage hike in the interest rate, but that may not matter if you’re able to refinance your loan.
Another alternative is to look for a mortgage lender that may keep and service the loans in-house. Known as a “portfolio lender” a lender of this type has greater flexibility in reviewing your loan application and may even offer you the same deal you would have received elsewhere.
Jan. 2, 2006.