If you are thinking about getting a second mortgage, you may discover that you just don’t qualify.
The Wells Fargo formulas for deciding whether you will be offered an increase in a home equity line of credit are making it more difficult for the average American. Self employed business owners seem to be affected deeply.
If you were caught up in the economic problems that started in 2008, you may have lost your job and had to look for other work or make other plans. So maybe it wasn’t the end of the world for you, but it wasn’t fun either. So you try something new and decide to go into a new type of work or something totally different than you were used to doing. You end up building your own business and it doesn’t start off with a bang, but hey, it pays the bills. Good for you. You helped yourself cope with a difficult situation.
So your business begins to grow and your 2009 income isn’t too bad. In fact it’s rather decent so you want to do the best thing for your financial situation by consolidating your debt and getting rid of any credit card debt so that while you are working to pay off debts you are getting a lower interest rate and can use the interest you pay to lower your taxable income. That would help you out.
Well, 2010 comes along and you’re business is really doing well. The best you could have ever hoped for and it’s growing. Congratulations! Great news. Life looks better in 2010 doesn’t it?
Not to Wells Fargo. Wells Fargo uses this procedure to decide whether they can increase your home equity loan. They require that you send in two years of tax returns. Well, remember that in 2008 with your new business just starting, you may have made over $10,000 and had $4,000 in deductions. Now Wells Fargo says that well in that year, you get credit for making $6,000. They won’t even count the rest of 2008 because it was in a different field. They then divide that by 12, because of course that is how many months there are in a year.
So they calculate that you are making $500 a month. Do they consider the 2009 income at all? Well sure they do, but because there is such a huge discrepancy, they have to go with the smaller amount of money that was made in 2008. But they will give you what they call a cap of 125%. They then multiply 125% times the $500 a month and come up with a $626.25 figure . That is the new figure of how much they think you make per month, regardless of what you made in 2009. Isn’t that smart?
Then they look at your current minimum payments for your mortgage, association fees and revolving credit and come up with your debt to income ratio. It doesn’t take a rocket scientists to figure out that most mortgages will exceed $626.25, so right there you’ve gone over 100% debt to income ratio and they come to the brilliant decision that they shouldn’t give you a loan, because well…your debt to income ratio is too high.
For people who have the guts to start their own business and pursue it, you are going to have to have to know that it is pretty useless to try to borrow any money until you’ve had a solid two years of income that they can wave their magic formulas on to predict what you will do in the coming years.It’s a good thing that entrepreneurs have more insight and determination to grow a business than the banks have to risk lending their money to you.
