What is happening with Self Employed Borrowers
Didier Malagies • June 12, 2020
What is happening with the new guidelines for the self-employed Mortgage Loans
Jordan Borchard posted in
Housing in Housing News
Self-Employed Borrowers Face New Scrutiny From Fannie, Freddie
Source: Orange County Register
Written by: Jeff Lazerson
Who cares if it is April, May or December when you make the big bucks from your business and stash the cash in your bank account? When it came to qualifying for a mortgage, the bottom line always was did your tax returns show you produced enough income to qualify for that loan you were eyeing.
Not so much anymore.
When Congress
enacted Dodd-Frank back in 2010, one of the requirements was your ability to repay the mortgage. The recession triggered by COVID-19 added a new wrinkle to the mortgage qualifying equation. On top of the most recent year or two of tax return income scrutiny, now deposits and interim profits are all the rage.
Nearly one in 10 U.S. workers is self-employed, according to the U.S. Bureau of Labor Statistics. If you own 25% or more of a business, you are by mortgage definition, sell-employed. Examples are mom and pop retailers and restaurant owners, repair services and small manufacturers. Less obvious examples are entertainers and actors, Realtors, court reporters and commission-only salespeople who are paid on a 1099, not a W-2.
Just how many of those self-employed borrowers saw slowdowns of their incomes or worse-their income abruptly coming to a halt as a consequence of mass layoffs and shelter-in-place orders?
Starting Thursday, June 11, Fannie Mae and Freddie Mac are mandating additional standards to scrutinize self-employed borrowers to determine if the borrower’s income is stable and there is a reasonable expectation it will remain stable.
Here is a sampling of additional factors lenders are scrutinizing:
1. Either an audited or unaudited year-to-date profit and loss statement reporting business revenue, expenses and net income through the month preceding the loan application date. They will also want to see the most recent two months of business bank statements.
2. Evidence that your business is still running, such as a valid business license, recent vendor invoices, a functional website, someone answering the phone or showing up in a Google search.
3. The stability of that industry you’re in during the pandemic. Do you own a nail salon? Or, do you own a security guard company that may be booming?
Other factors include:
1. Does your year-to-date profit and loss statement square up to last years’ income tax statement? Let’s say your 2019 tax returns indicated $8,000 average monthly income. But your year-to-date income this year fell to $5,000 per month. Your lender is likely to use $5,000 per month as your mortgage qualifying income. If your business income is seasonal and you can show strong, clear, verifiable evidence of orders that are about to close, your lender may use the $8,000 of monthly income.
2. Payroll Protection Plan (PPP) and/or any similar COVID-19 programs or grants will not be considered as business assets.
3. Co-borrowers such as spouses who are furloughed or collecting unemployment cannot have their income counted until they are back to work.
4. If you have rental property income and that income is needed to help you to qualify overall, your lender may require proof of ongoing payments by your tenants.
Some lenders raised the bar well before F& F’s new self-employment mandates. I just completed an Irvine rental property refinance for one of my self-employed clients. Even though he was able to knock the rate and payment down from 4.625% to 3.75%, he was worn down by the extra scrutiny.
“I’m glad I did the refinance,” he said. “But if I had known what was involved, I probably would not have done it.”
Before you invest your valuable time to purchase or refinance, provide clear and detailed data about your business expenses, income, cash flow and the like. Explain exactly why you believe the outlook is good for your business. Give the detailed ammunition needed to convince your lender to just say “yes”.
Freddie Mac rate news: The 30-year fixed-rate averaged 3.21%, up slightly from last week. The 15-year fixed-rate averaged 2.62%, unchanged from last week.
The Mortgage Bankers Association reported a 9.3% increase in loan application volume from one week earlier.
Bottom line:
Assuming a borrower gets the average 30-year fixed rate on a conforming $510,400 loan, last year’s payment was $174 more than this week’s payment of $2,210.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA (up to $442,750 in the Inland Empire, up to $510,400 in Los Angeles and Orange counties) at 2.75%, a 15-year conventional at 2.625%, a 30-year conventional at 2.875%, a 30-year conventional high-balance ($510,401 to $765,600)at 3.44%, and a 30-year jumbo adjustable-rate mortgage that is locked for the first five years at 3.25%.
Eye catcher loan of the week: A 15-year fixed-rate conventional mortgage at 2.25% with 1.25 points cost.
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Here are alternative ways to qualify for a mortgage without using tax returns: 🏦 1. Bank Statement Loans How it works: Lenders review 12–24 months of your business or personal bank statements to calculate your average monthly deposits (as income). Used for: Self-employed borrowers, business owners, gig workers, freelancers. What they look at: Deposit history and consistency Business expenses (they’ll apply an expense factor, usually 30–50%) No tax returns or W-2s required. 💳 2. Asset Depletion / Asset-Based Loans How it works: Instead of income, your assets (like savings, investments, or retirement funds) are used to demonstrate repayment ability. Used for: Retirees, high-net-worth individuals, or anyone with substantial savings but limited current income. Example: $1,000,000 in liquid assets might qualify as $4,000–$6,000/month “income” (depending on lender formula). 🧾 3. P&L (Profit and Loss) Statement Only Loans How it works: Lender uses a CPA- or tax-preparer-prepared Profit & Loss statement instead of tax returns. Used for: Self-employed borrowers who can show business income trends but don’t want to use full tax documents. Usually requires: 12–24 months in business + CPA verification. 🏘️ 4. DSCR (Debt Service Coverage Ratio) Loans How it works: Common for real estate investors — qualification is based on the property’s rental income, not your personal income. Formula: Gross Rent ÷ PITI (Principal + Interest + Taxes + Insurance) DSCR ≥ 1.0 means the property “covers itself.” No tax returns, W-2s, or employment verification needed. 💼 5. 1099 Income Loan How it works: Uses your 1099 forms (from contract work, commissions, or freelance income) as income documentation instead of full tax returns. Used for: Independent contractors, salespeople, consultants, etc. Often requires: 1–2 years of consistent 1099 income. Higher down payment and interest rate required. tune in and learn https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329
A third mortgage is an additional loan secured by the same property after a first and second mortgage already exist. It’s essentially a third lien on the property, which means it’s in third place to be repaid if the borrower defaults — making it riskier for lenders. Because of this higher risk, third mortgages typically: Have higher interest rates, Offer smaller loan amounts, and Require strong borrower profiles or solid property equity. 🤖 How AI Is Transforming 3rd Mortgage Lending AI tools can make offering third mortgages much more efficient and lower-risk by handling the data-heavy analysis that used to take underwriters days. Here’s how: 1. AI-Powered Lead Generation AI platforms identify homeowners with significant equity but limited cash flow — ideal candidates for third liens. Example: AI scans property databases, loan records, and credit profiles to spot someone with 60–70% total combined LTV (Loan-to-Value). The system targets those borrowers automatically with personalized financing offers. 2. Smart Underwriting AI underwriters use advanced algorithms to evaluate: Combined LTV across all liens, Income stability and payment history, Real-time credit behavior, Local property value trends. This allows the lender to make quick, data-backed decisions on small, higher-risk loans while keeping default rates low. 3. Dynamic Pricing AI adjusts rates and terms based on real-time risk scoring — similar to how insurance companies use predictive pricing. For example: Borrower A with 65% CLTV might get 10% APR. Borrower B with 85% CLTV might see 13% APR. 4. Automated Servicing and Risk Monitoring Post-funding, AI tools can monitor the borrower’s financial health, detect early signs of distress, and even suggest restructuring options before default risk rises. 💡 Why It’s Appealing Opens a new revenue stream for lenders and brokers, Meets demand for smaller equity-tap loans without refinancing, Uses AI automation to keep costs low despite higher credit risk, Attracts tech-savvy borrowers seeking quick approvals. tune in and learn https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329
Great question — the 10-year U.S. Treasury Note (T-Note) is one of the most important benchmarks in finance, and it’s tightly linked to interest rates. Here’s a breakdown of how it works and why it matters: 1. What the 10-Year Treasury Is It’s a bond issued by the U.S. government with a maturity of 10 years. Investors buy it, loaning money to the government in exchange for: Semiannual coupon payments (interest), and The face value back at maturity. Because it’s backed by the U.S. government, it’s considered one of the safest investments in the world. 2. Yield vs. Price The yield is the effective return investors earn on the bond. The yield moves inversely with the bond’s price: If demand is high and price goes up → yield goes down. If demand falls and price goes down → yield goes up. 3. Connection to Interest Rates The 10-year Treasury yield reflects investor expectations about: Future Federal Reserve policy (Fed funds rate). Inflation (higher inflation expectations push yields higher). Economic growth (slower growth often pushes yields lower). While the Fed directly controls only the short-term Fed funds rate, the 10-year yield is market-driven and often moves in anticipation of where the Fed will go. 4. Why It’s So Important Mortgage rates & lending costs: 30-year mortgage rates generally move in step with the 10-year yield (plus a spread). If the 10-year goes up, mortgage rates usually rise. Benchmark for global finance: Companies, governments, and banks often price loans and bonds based on the 10-year yield. Risk sentiment: Investors flock to Treasuries in times of uncertainty, driving yields down (“flight to safety”). 5. Practical Example Suppose the Fed raises short-term rates to fight inflation. Investors expect tighter policy and possibly lower inflation later. If they believe inflation will fall, demand for 10-years might rise → yields drop. But if they fear inflation will stay high, demand falls → yields rise. Mortgage rates, business loans, and even stock valuations all adjust accordingly. ✅ In short: The 10-year Treasury is the bridge between Fed policy and real-world borrowing costs. It signals market expectations for growth, inflation, and Fed moves, making it a crucial guide for interest rates across the economy. tune in and learn https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329
