Unfortunately, Freddie Mac, Fannie Mae and FHA (Conventional Mortgages) will only recognize the adjusted gross income that is left after deductions when underwriting a mortgage. Everyone knows that self employed, small business owners make more money than they show at the "end of the day" on their taxes. If the underwriting guidelines were changed to calculate income from a gross revenue formula like they do for wage earners we wouldn’t have a need for stated income documentation loans. Self employed borrowers do not have the luxury of showing a W2 as wage earners do and are therefore unable to prove enough income to qualify for most mortgages.

Stated income loans were born out of a necessity to accommodate small business owners who found their selves in this predicament. Admittedly, they were abused and ultimately share a large part of the blame for why we are in the financial mess we are today. However, if we adopt a universal threshold for debt to income ratios without addressing the underwriting guidelines for conventional mortgages we will cripple small business and the mortgage industry.

The common response to this is "why don’t all of the small business owners claim more income in order to qualify for loans and mortgages?" This is a good argument; however in all fairness self employed, small business owners have endured the brunt of the tax increases over the years. A large percentage of these businesses live and die by these tax deductions. We will effectively be raising taxes on small business owners by asking them to disallow bona-fide tax deductions and claim more income.

Think about the billions of extra tax revenues Uncle Sam would earn as a result of the increased tax burden on small business owners. Are we to believe that law makers are unaware of this "unintended" tax as a result of the new mortgage reform laws? Also think about the hundreds of thousands of small businesses that are scraping by right now that would join the ranks of the self employed if their taxes were doubled. I guess the government could use the extra income to pay unemployment benefits, but isn’t that called socialism?

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