Applying for a home loan has become more challenging for self-employed people and small-business owners after the recession and recent banking reforms.

Banks now require those who are self-employed to provide tax returns as proof of income before issuing a mortgage, following regulations put in place in January as part of the Dodd-Frank Act, said Amanda Averch a representative of the Colorado Bankers Association.

"It's taken ability away from banks to be able to give somebody the benefit of the doubt," said Averch.

So it is key that self-employed borrowers be conscious of the requirements.

Before the recession, some self-employed people with good credit, could simply tell banks what their income and assets were to qualify for a loan, said Jennifer Tewell, a mortgage loan specialist at First National bank.

In 2010, many banks started requiring more documentation of income, she said.

Now that has been further reinforced by the January regulations.

These were put in place with the good intention of protecting borrowers from getting into a loan they couldn't afford, she said.

However, some of the self-employed often downplay their net income to avoid paying higher taxes.

But banks are looking for a self-employed person's net income to be consistent or increasing, Tewell said. The number of tax returns required to prove income is somewhat at the discretion of the bank, said Kevin Barlow a senior loan officer for Mancos Valley Bank. His bank requires three years of tax returns. First National Bank requires two years of tax returns, Tewell said.

The regulations also require that the self-employed provide third party verification that the business is operational and allow the banks to request a transcript of their tax return from the IRS.

The third-party verification can simply mean a quick check on the Colorado Secretary of State's website to ensure the business is listed, Tewell said.

Mancos Valley Bank will accept a variety of things including written statements from other financial institutions and utility bills showing the businesses accounts are current, Barlow said.

Banks consider credit, assets and the down payment. Better credit and a higher down payment can lower the monthly payment.

"Really it just boils to making sure that the cash flow shows that you can make the payment," said Tewell.