The Self-Employment Catch-22

Prices are 20 percent off the highs, condo builders are offering tons of incentives, and sellers are—reportedly—happy to negotiate. For a lot of people whose incomes have put them in the “maybe someday” home-buying category, that someday may be today. Yet tens of thousands of people are suddenly, frustratingly, being shut out of the market anew.

They’re freelance workers, of whom there are around a million in the New York and who constitute about 25 percent of the city’s mortgage market. Strict new rules, established after bad mortgages crippled banks, have made obtaining financing nearly impossible unless the borrower can show a regular paycheck. “Now you can be ready, willing, and able to buy, but you can’t get the money,” says Sara Horowitz, executive director of the Freelancers Union, which has 75,000 members in New York.

The real-estate market has always presented special difficulties for the self-employed, because they lack the paper trail that is the backbone of mortgage applications. Banks like to see “income velocity and regularity,” says Jeff Appel of Preferred Empire Mortgage, and freelancers often can’t give a clear picture of either. Some months can be leaner than others, even in a good year. And freelancers appear to make less than their W-2 counterparts, as their up-front income doesn’t reflect the business deductions that will lower their taxes later. In the past, there were work-arounds, like no-documentation or low-documentation loans that allowed them to use grosses, not net income, to gauge what they could afford. Freelancers would pay a little extra for these mortgages, but not much—interest rates during the boom were at most a half-percent higher, says mortgage banker Richard Martin. Buyers with very good credit could do a bit better, and even those with less-stellar numbers would probably get approved.

No more. No-doc or low-doc loans are rare now, because “a few million bad apples misused them,” Appel says. If you happen to get one, expect an interest rate as much as 4 percent higher than for a conventional loan, Martin says. Credit scores have to be above 680, too, and down payments must be at least 25 percent of the purchase price. (Some co-op boards have grown pickier about freelancers, too, though a rock-solid board package detailing a steady income stream could at least pave the way to ownership—or you could always go condo.)

Then there are little-known technicalities. If income’s been sliding for the past three years, banks take the leanest year as a guideline, and if it’s been on the upswing, they average the three years. Banks also want to see a track record of two solid years of self-employment, Martin says. And they’re bound more than before by rigid algorithms that don’t allow for irregularities like sloppy invoicing or cash payments. “You’ve got mortgage guys doing everything by the numbers,” says Horowitz, adding that many of them don’t parse clients’ records individually. Which seems at odds with a world where salaried jobs are disappearing. “This is the way the world is moving,” she adds. “It’s sort of crazy that there’s not [another] way to look at this.”

The Self-Employment Catch-22