Self-Employed Face Challenges With Second Home Financing

With 2012 Income Tax Returns in the bag, some Americans are turning their attention to the purchase of a second home.  

For the self-employed, all the deductions that whittle down taxable income end up hurting borrowers when they apply for a mortgage loan.     The top of the financial food chain pays cash for a vacation home, according to Judy Desiderio, president of Town and Country Real Estate in East Hampton, NY.   For those who can't write a check for a second house, it takes a lot of cash for the down payment. 

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The National Association of Realtors reports 553,000 vacation homes were purchased last year, representing 11 percent of all homes sold.   Of those, 46 percent were paid for in cash.  The rest afforded a median down payment of 27 percent.

On Cape Cod, second home conventional loans of $417,000 can be secured for employed borrowers with just 10 percent down, according to Jeff Kobold, branch manager of Prospect Mortgage in Orleans, Mass.    "Then we are in jumbo territory in Barnstable County".  

Self-employed individuals face stiffer standards.   While Kobold says "it's just as easy to make a loan to a self-employed borrower as an employed borrower, it  takes a little more time to evaluate their tax returns".   

Kobold says it is possible for self-employed borrowers to purchase a vacation property with 35 percent down, up to a loan of $750,000.

In the end, it's a question of the borrower making good on the loan, and lenders will want to see how many months the self-employed individual has in reserve.  As Daniel Gualtieri, vice president of GFI Mortgage Bankers in the Hamptons says, "This whole Dodd-Frank thing is all about the borrowers' ability to show they are qualified to repay the loan.