employed individuals will often take advantage of tax deductions, which results in a smaller perceived income. As a result, they have a much harder time getting a loan. If the borrower has been self-employed for only a short time (less than two years), it is extremely difficult to get approved for a loan.
Payment Shock
Another issue to mention that plays some part in loan underwriting decisions is called “payment shock.” This is when, despite the best intentions and careful planning, a new homeowner is surprised to find that their new living expenses are far greater than they had anticipated. A good loan officer and underwriter will try their best to figure this out ahead of time. However, it’s easy to overlook certain future expenses. For example, perhaps the borrower/buyer has an advantageous rental on a small apartment and pays $800 a month and has an annual income of close to $100,000. You (and the lender) know you can easily afford an $1,800-per-month mortgage payment. But living in a rented apartment doesn’t involve other costs that you now will be responsible for, like homeowner’s insurance payments, property taxes, landscaping fees, trash removal payments, etc. The $1,800 mortgage also doesn’t factor in replacements and repairs of in-home property, like water boilers, laundry machines, electrical issues, etc. Suddenly, that $1,800 mortgage payment has become a much, much bigger number. That’s called payment shock. If a lender thinks you may face payment shock after moving into their new home, that doesn’t automatically hinder the loan going through. However, the underwriter is going to take this into consideration as best they can and will carefully check your reserves, i.e., how much money you have in savings.
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