Small business owners, gig-economy workers and self-employed entrepreneurs are likely to see the home mortgage process becoming a lot easier in the future.
Most lending institutes favored applicants with access to easy to declare income documents, such as 2-years of steady income, W-2s and underwriters pay stubs. Because of these rules, the self employed and gig economy can find it difficult to declare the appropriate paperwork. They often have frequent swings in earning or earn from multiple jobs.
For instance, someone may take on several jobs such as a food-truck business that is cash-intensive and also an Uber driver. While this combined business has the potential to earn a decent income and build a useful savings account and credit score, but the income will vary from month to month depending on the number of customers. Because of the variation in income it is quite difficult to convince a lender of a stable monthly amount. Beyond the fact the income isn’t stable, it is also difficult to document some of the payments received.
Many loan officers will simply decline the application because it isn’t possible to comply with the mandate issued in the Federal mortgage (QM) regulations.
However, this doesn’t always mean there are no mortgage application options. Other, less appealing options may be offered such as making a large down payment or paying a higher interest rate.
One of the latest options is this Self-Employed Mortgage Access Act. This act is co-sponsored by Mike Rounds (R-S.D.) and Senator Mark R. Warner, who says it can help up to 30% of the American workforce (42 million people) that work in the gig economy or self-employed. It gives lenders a wider scope to verify a person’s income which goes beyond the limitations of the QM regulations.
There are many self-employed that are very creditworthy, but unable to get started in the housing market because they simply don’t hold the W-2s or pay stubs like a typical 9-to-5 worker.
More and more lenders are saying the nontraditional income earners are starting to become a significant issue. Anyone that changes to an independent status from a W-2 employee will find it a lot more difficult to get accepted for a mortgage in the future.
It has started to get to a point where it is now easier to offer a commercial load in the region of $5 million compared to a much smaller QM mortgage required by the self-employed or those involved in the gig economy. This even applies if the home buyer has the ability to put down the requested down payment and has a good credit rating.
According to the Mortgage Bankers Association, many of the QM policies are highly prescriptive.
For instance, a worker in the auto-industry was looking to invest in a new home using the combined income from a small sideline business and full-time employment. Due to the cost of starting up the private business, there was a tax loss in the region of $500 for the first year which was noted on the IRS Schedule 1040E. This meant it was only practical to make a mortgage application based on the regular 9-to-5 income. The options to use the part-time income were quite excessive under the QM regulations.
While the existing guidelines are well intended, they aren’t quite right for the modern day with the varied choice of employment. Many believe that the Warner-Rounds bill is a very effective option, although it isn’t likely to get approved for a while.
Also, the major mortgage lenders, such as Freddie Mac and Fannie Mae are reviewing their options to put in place a mortgage package that is based on fair underwriting for the gig-economy and self-employed applicants. The preferred option is based on an automatic solution that will be able to calculate the income for the workers with an independent statue.