For self-employed workers, qualifying for a mortgage just got tougher. In response to the coronavirus recession, mortgage agency giants Fannie Mae and Freddie Mac this month raised the bar for borrowers who are independent contractors or owners of small businesses.
“We’re seeing lenders tighten the screws,” says Jeff Lazerson, a mortgage broker who’s president of Mortgage Grader in Laguna Niguel, California. “Now everybody is asking for year-to-date bank statements.”
The U.S. economy fell into a deep recession this spring, and lenders want to make certain self-employed borrowers can make payments. So mortgage issuers are requiring borrowers to submit additional paperwork, including profit-and-loss statements and bank statements. The goal is to verify that a borrower’s financial picture hasn’t darkened in the past few months.
At the request of Fannie Mae and Freddie Mac, the government-backed companies that buy most of the mortgages issued in the U.S., lenders are asking self-employed borrowers for additional documentation. According to new guidelines from the agencies, borrowers now must provide year-to-date profit-and-loss statements that show revenues, expenses and net income so far in 2020.
“You’re having to show the borrower still has the income they’re showing on their tax return,” says Audrey Boissonou, a loan officer at Guarantee Mortgage and president of the California Association of Mortgage Professionals. If your income has fallen, you’ll qualify for a smaller loan. So if you made $7,500 a month as a real estate agent or independent consultant last year but your income fell to $5,000 a month this year, your maximum loan amount would decline.
Lenders also are insisting on evidence that a business is still operating, such as recent invoices or a current business license. And lenders are skeptical of owners of businesses such as restaurants, bars and gyms, many of which were forced to close.
While Uber drivers and food-truck operators are obvious victims of the shutdown, others have faced tough times, too, including some lawyers and real estate agents, Lazerson says.
The new paperwork requirements raise the degree of difficulty for borrowers. “It’s an obstacle,” he says. “The borrowers don’t like it, and it creates tension.”
On the other hand, Lazerson says, the more stringent requirements make sense for both lenders and borrowers. Lenders don’t want to be saddled with loans that borrowers can’t repay, especially with the federal government offering generous forbearance programs. For borrowers, falling behind on a mortgage can prove financially devastating.
Stimulus payments might not count
The federal government has pumped trillions of dollars into the U.S. economy, including Paycheck Protection Program loans to small businesses, and emergency grants through the Small Business Administration. Lenders can look at those funds when determining whether a borrower’s business is stable. However, PPP loans can’t be considered “business assets,” according to Fannie and Freddie.
Millions of Americans are independent contractors or business owners, and they’ve grown accustomed to providing piles of paperwork when applying for mortgages. The new rules make it harder — but not impossible — to take advantage of record-low rates.
“You definitely can refinance,” Boissonou says. “You just have to meet the guidelines.”
If your business income plummeted in April and May, however, there’s no point in applying for a mortgage until your business is back on track. “I keep advising people, ‘Just be patient. Just wait,’” Boissonou says. “If your bank statement is not showing what it needs to show now, just wait two months.”
Lazerson gave similar advice to a physical therapist whose practice had been forced to close for a prolonged period. He told the borrower to focus on reviving his business over the summer, and then try for a refinance again in September.
What you can do
- Be realistic about your finances. Was your restaurant or gym forced to close for a month or two? Did your Uber income dry up? If so, understand that financial potholes hurt your chances of getting approved.
- Don’t give up if you still have income. If your income was reduced but didn’t disappear entirely, it’s still possible to get approved for a loan, so long as the amount of the mortgage falls comfortably within your ability to repay.
- Try again in a few months. If your business is getting back to normal, take advantage. Use the reopening to rebuild your financial track record.
- Don’t fret about missing out on record-low mortgage rates. Most experts believe that rates will stay low for the rest of the year and possibly much or all of next year as well. In these strange economic times, the standard advice about locking in a low rate as soon as possible no longer applies.
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