Has underwriting loosened up for self-employed borrowers?

Question of the week: Has underwriting loosened up for self-employed borrowers?

Answer:  No.

Prior to the pandemic the underwriting guidelines for self-employed borrowers were either one or two years of personal and business tax returns (if applicable) depending on how long you have been self-employed, or owned a business. As well, some cases called for a year-to-date profit and loss as well.

During the pandemic guidelines on self-employed borrowers tightened up due to the number of businesses that were negatively impacted by the pandemic, either having to close due to government regulations, or lost business and declining revenue.

Despite the surge in business activity, with many businesses seeing revenues approaching pre-pandemic levels, the self-employed guidelines for determining income remain the same.

Guidelines put in place last year require not only the tax returns but also a year-to-date profit and loss, plus bank statements for the prior three to six months for the business to show the income was in line with the profit and loss revenues.

It is evident from the conditions and requirements for needed documentation that some of the lenders we work with are not interested in funding loans from self-employed borrowers; we have identified these lenders and have them off our potential list for our self-employed clients. We have also had self-employed clients come to us who were applying with on-line lenders or direct lenders who do not want to take the time and effort required to follow the current underwriting guidelines.

These guidelines not only apply if you own a business, file a Schedule C with your tax returns for self-employed income, but also for applicants who own investment property and the net income from those properties are needed for qualifying.

For those using rental income for qualifying, underwriters are asking for proof rents have been paid and current. This is to ensure that applicants tenants have not been withholding rent payments as allowed under city, county or state regulations in various regions.

Will the guidelines for self-employed and rental income loosen in the future to pre-pandemic guidelines? That is a big question to which we do not yet know the answer. My inclination is if they are loosened it will likely be sometime in 2022 and not before the end of 2021.

I have been wrong before in my opinions in the WR&MU, hoping I am wrong here as well and the guidelines loosen sooner than later.

Have a question? Ask me!

A surge in employment in June beat expectations as new hires for the month were almost 50% more than in May as 850,000 new workers were added to payrolls. By the far the largest amount of hiring was in the service industry, in particular hospitality, as 343,000 job openings were filled.

More people are also seeking work, as shown by the increase in the unemployment rate from 5.6% in may to 5.9% in June. With approximately 9.3 million job openings in June, it appears many of those seeking work are not jumping at the first offer they receive and are being more selective in where they will collect a paycheck.

With twenty-six states ending federal stimulus funds of $300 per week to unemployed workers, expect more potential workers to be seeking employment in those states. Not helped by any unemployment payments are those who are voluntarily quitting their jobs, an estimated one-million workers did just thin in June.

Rates for Friday July 2, 2021: Despite the good news from the Labor Department on June employment and the three-day weekend which usually sees upward pressure on rates, this Friday we see rates flat from last week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.75%  Flat

30 year high-balance conforming                   3.00%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

As is tradition in the WR&MU on the Friday before Independence Day, I encourage everyone to read the Declaration of Independence, and forward to others to read as well. Here is the transcription from our founding document as displayed in the National Archives.

Have a Happy Fourth, pursue your happiness with joy and others.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog