Self-Employed Workers Catch a Break on Mortgages
The number of self-employed workers in the US range from 10 to 15 million, depending on definitions of self-employment. The Great Recession took its toll on self-employed workers, but over the past few years, self-employment has been on the rebound. Baby Boomers are leaving traditional jobs and putting their experience and skills to work as consultants. Traditional self-employment jobs like child-minding, caregiving, construction, and free-lance journalism are on the rise and a new generation of workers are adopting a gig economy approach to employment, working in different jobs as an independent contractor.
One source, a company in Herndon, VA that provides support for independent workers, estimates that in 2018, the total number of independents rose 2.2%–41.8 million from 40.9 million in 2017. The Bureau of Labor Statistics forecasts a 7.9% growth rate by 2026.
Working on a self-employed basis has its pros and cons. One of the greatest problems self-employed workers face is jumping through extra hoops in order to get a mortgage. Verifying the employment and income of a self-employed worker is more difficult for a lender accustomed to working with traditional workers who receive W-2 forms every year and have human resource departments that can answer lenders questions. Because a self-employed workers income can rise or fall quickly, most lenders consider them a risky investment even if they make more than their full-time employed counterparts.
The financial website Bankrate recommends that self-employed and gig economy workers should be proactive by thoroughly covering their financial bases before applying for a mortgage.
Their suggestions include:
Continually monitor your credit. Contest any errors.
Gather necessary forms and tax returns. Use statements from brokerage houses, bank accounts, and other documentation to establish income.
Know your debt-to-income ratio (DTI). Your DTI measures the relationship between your debts and income.
Research your lender. Do your research to be sure that based on your qualifications, you really are getting the best interest rate possible. Be thorough.
Changes in Automated Underwriting Software
Even if you can take these steps to secure financing, you still may have problems getting a mortgage. Fannie Mae and Freddie Mac buy more of the single-family mortgages from lenders than anyone else. They both provide lenders with software that automates the underwriting process. These automated underwriting programs were not designed to handle the variety of documentation that self-employed workers can use to establish their income. Lenders must underwrite applications from self-employed workers manually, which can add days to the underwriting process.
Late last year, Fannie Mae and Freddie Mac announced that they are making changes in their automated underwriting software that will simplify and automate the process for calculating the income for a self-employed borrower. The changes took effect at the beginning of this year.
The new system executes automated interpretations and calculations based on the income on tax returns supplied by the self-employed borrower. It promises to take three to five days out of the process of underwriting a mortgage which cuts hundreds of dollars in costs and slashes risk for the lender.
Using Additional Sources to Report Income
Legislation is working its way through […]