Self-Certified Mortgages
Self-certified mortgages, or “self cert” mortgages, allow individuals with incomes that are difficult to quantify to get financing for a home. With regard to the recent sub-prime mortgage crisis, self-certified mortgages are somewhat controversial –both for lenders and consumers. However, self-certified mortgages still play an important role for a certain subset of home buyers.
What is a self-certified mortgage?
Typically, a bank will calculate the principle, interest rate and terms of a mortgage loan based on your income, assets and credit rating. Regarding income, mortgage lenders will simply take your earnings information directly from your W-2 and plug it into their formula to determine what kind of loan you are eligible for. For this with normal wage or salary employments, this works well. But for small business owners, the self-employed, freelance workers and employees who earn most of their income from commission, it is a bit more difficult to prove a reliable income.
In principle, this is somewhat unfair. After all, if a W-2 employee loses their job, their income essentially goes to zero. Meanwhile, a freelance worker or small business owner may have multiple streams of income, thereby decreasing their risk of losing their income. Nevertheless, because it is difficult to prove to a mortgage lender that this type of income is steady and reliable, home buyers such as these often have difficulty getting conventional mortgages.
Self-certified mortgages provide a compromise for situations such as these. With a W-2 employee, it is simple for a lender to call and verify your employment. But with varied and multiple sources of income, such verification is not feasible. Thus it falls upon you as the borrower to submit an accurate snapshot of your yearly income to the lender. The lender will verify this information to a certain degree.
In a stated income/stated asset mortgage (SISA) or a low documentation loan, lenders may ask to see your tax return and may verify some of your sources of income. They may also ask to see client lists, cash flow statements and other business documents. They will then base your eligibility on this information.
In a no documentation loan, or an Alt-A mortgage, banks won’t seek to verify any of the information you provide them. Because of the potential for abuse, this type of loan is known pejoratively as a “liar’s loan.” However, when used appropriately—for example, if your business operated at a loss in the previous year but is otherwise solvent and profitable—no documentation loans can help certain individuals get mortgages.
What are the advantages of a self-certified mortgage?
The obvious advantages of a self-certified mortgage is that they allow home buyers with unconventional incomes and assets to get home loans. Self-certified mortgages work best for individuals who do have good sources of income that are difficult to document.
What are the disadvantages of a self-certified mortgage?
With a self-certified mortgage, you are asking the mortgage lender to place more trust in you than they would a typical home-buyer. This has a couple of effects on your situation. For one, it will almost always remove you from the category of “prime” borrowers. This means that you are seen as less of a “safe bet” than someone receiving a conventional mortgage. As such, you will likely pay higher interest rates and fees and have a lower loan-to-value ratio. This means that you’ll have to put down a higher down payment and may have to buy mortgage insurance in order to protect your lender from liability in the case of default and foreclosure.
The more real danger, however, is to your self. A default or foreclosure is mutually detrimental to both you and your mortgage lender. By self-certifying your mortgage, you are shouldering more of the responsibility of ensuring that you can in fact afford the mortgage you are being given. In a conventional mortgage, the bank has a set of formulas and procedures that help them determine whether or not you can viably afford to finance any given home. With a self-certified mortgage, you are forgoing these institutional protections and screenings. Because of this, it is absolutely imperative that you can realistically gauge your ability to make your monthly mortgage payments. Exaggerating your assets, fudging the numbers or lying outright is ultimately to your disadvantage.
How do you get a self-certified mortgage?
You can get self-certified mortgages from the same types of mortgage lenders who give conventional loans. In fact, because self-certified mortgages are riskier and more complex, it is in your best interest to choose a reputable and established bank, credit union or mortgage broker to help you get a favorable loan. Avoid fly-by-night brokers and lenders with unverifiable reputations who make overblown promises. Instead, choose a mortgage lender based on independent research, referrals and common sense. When you meet with a loan officer or mortgage broker, explain to them your situation and ask if they can offer you a self-certified mortgage or another similar solution.