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The Credit Crunch and Self-Employment

Posted by Valencia on March 19th, 2009

One of my friends was recently laid-off from her job. And after a couple of weeks of soul searching, she decided to take the plunge and start a home business. Although she’s happy and eager to start this new chapter in her life, there’s a part of her that questions the decision. Not because she’s afraid to hustle, or because she thinks the business might fail. But rather because she knows it’ll be harder for her to qualify for loans and credit in the future - especially since she’s single.

I can sympathize with her nervousness. My husband and I purchased our first home in 2006. And despite having good credit and the income to afford the payment on our future home, one lender didn’t want to use my income. By this time, I had been self-employed for five years. I paid taxes like everyone else, and I even had a savings account to prove how financially responsible I was. But for some reason, the fact that I was self-employed made them nervous - and if it wasn’t for husband having an employee status - we probably wouldn’t had gotten our place.

With the current economic situation, lenders are tightening the belt. But it’s not just mortgage lenders - auto lenders, student loan lenders and credit card companies are being very selective. And whereas a self-employed person used to be able to get a no-doc or stated loan income, those days are gone.

Self-employed people usually have write-offs to lower their tax obligation. Unfortunately, what helps you on your taxes won’t help you when applying for a mortgage loan. Lenders typically base loan approval on your income AFTER write-offs, which is often considerably less. This is a lesson I didn’t learn until I applied for a home loan, and I’m sure there are other self-employed people who are unaware of this.

Now that my husband is seriously consider growing his side business and ultimately becoming his own boss, I fear for our future. Will we be able to qualify for a new home loan in the future? While I’m a big fan of self-employment, it’s almost worth him keeping a job. That way, we won’t have deal with huge health insurance premiums. And as long as one of us recieves a w-2, obtaining credit shouldn’t be a problem.

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And as long as one of us recieves a w-2, obtaining credit shouldn’t be a problem.

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