Self-employed? Good luck getting a mortgage

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It's never been easy to get a mortgage if you're self-employed. But a recent analysis of mortgage data shows just how much harder it is.

Getting lenders to quote you a rate is tougher if you don't work for someone else, according to a report Thursday from real estate researcher Zillow.

Though they typically have higher incomes, put more money down and buy bigger homes, self-employed online mortgage shoppers got just six loan quotes from lenders for every 10 offered to borrowers who aren't self-employed, Zillow found.

"That's the first battle," said Erin Lantz, vice president of mortgages at Zillow."The second battle is actually getting through all the paperwork."

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Regardless of their employment status, mortgage applicants today need to be prepared for a time-consuming paper chase. For a salaried worker, a batch of W-2 forms, pay stubs and bank statements will get the ball rolling. For the self-employed, the work has just gotten started.

"For a self-employed borrower, we have to look at two years of tax returns and if they're incorporated we have to look at a corporate return," said Amy Tierce, a regional vice president for Wintrust Mortgage in Boston. "So we're looking at way more a paperwork for the self employed borrower than we are for the salaried borrower. It can feel very onerous to keep supplying stuff."

'Lender Googled me'

Marcie Geffner, a Los Angeles freelance writer, agrees. She was self-employed the last time she got a mortgage. So when she refinanced her home last year, she thought she was prepared for the list of documents she was asked to provide: the standard mortgage application, copies of bank statements and tax returns for three years.

"Then the lender Googled me—which was very creepy and unexpected," she said. "Then they started asking for the name of my clients. That was where it started to feel intrusive—crossing a line into my business that I did not expect."

But the line between personal and business finances can be blurred when you're self-employed—which is one reason it can be harder to qualify for a loan, according to mortgage brokers. Self-employed applicants may be on the hook personally for business debts that don't show up on a personal credit report, for example.

Many self-employed workers also have a harder time meeting income guidelines because they take advantage of tax breaks to lower their tax bill.

"One of the reasons people like to be self-employed is you can minimize what you're paying to the IRS by taking all these deductions," said Glenn Gordon, a mortgage broker at Prime Lenders in Fort Lauderdale, Florida. "They're all looking to minimize their bottom-line incomewhich is great when it comes tax time but it's terrible when it comes mortgage time and buying a home time.

To offset the variable incomes typically reported by self-employed applicants, lenders may demand a bigger financial cushion in the form of savings or investments.

That may also be why self-employed applicants typically report higher salaries that those with a paycheck from an employer, according to Zillow's analysis. Self-employed borrowers report an average household income of $145,000—some 81 percent higher than household incomes for borrowers who aren't self-employed, Zillow found.

To win approval, self-employed borrowers typically have to put more money down, according to Zillow's analysis. The average down payment for a self-employed borrower in Zillow's analysis was 15.3 percent compared with 14.6 percent for those who were not self-employed.

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Self-employed mortgage shoppers also typically have lower credit scores, according to Zillow. Some 47 percent reported scores below 720, while 28 percent have scores below 680. For salaried mortgage shoppers, only 23 percent had credit scores below 720, while 14 percent have scores below 680.

Lenders are typically looking for a credit score of at least 740 for the best mortgage rates. Most insist on a 640 score for approval, but some lenders have begun greenlighting applications a little lower down the credit ladder.

Paperwork nightmare

While an improving economy and stronger job market have prompted some lenders to ease up a bit on credit standards, they haven't eased up on paperwork—especially when it comes to proving how much savings or investments you've got saved up.

"They're tough, very tough," Gordon said. "Documentation is a nightmare. And the biggest nightmare these days is sourcing funds. We've got to be meticulous."

All that paperwork is just as time-consuming for the lender as it is for the borrower. And that's just one more reason some lenders may shy away from taking applications from self-employed mortgage shoppers: the return on investment is lower, Lantz said.

"A lot of lenders talk about it like manufacturing costs," she said. "If you have to make a loan—it takes a lot of time in people and paperwork—that's how much costs to product the widget, to produce the loan. For a self-employed borrower that cost is higher."