Question of the week: I am self-employed and do not have a W2 salary, what are my mortgage options?
Answer: In February, the WR&MU covered if it was easier for self-employed income earners to get a mortgage. The response was within guidelines for conventional mortgages, broadly Fannie Mae, Freddie Mac, and other mortgage products whose underwriting guidelines align closely with Fannie and Freddie.
But what if you cannot qualify for the mortgage you want using the Fannie/Freddie guidelines?
Self-employed and W2 salaried borrowers, in general, have had more challenges qualifying for credit than salaried borrowers. This is due to expenses from their employment being deducted from their gross income when filing their taxes. Auto and travel, entertainment, office supplies, office space, marketing, legal and accounting, employees, are just some of the expenses that are deducted to arrive at taxable, or adjusted gross income (AGI).
Adjusted gross income is what is used for qualifying for the vast majority of mortgage products.
For some, many?, self-employed workers their deducted expenses decrease their AGI to the point that they are unable to qualify for a mortgage to purchase a home they can afford based on their monthly and annual cash-flow.
Many WR&MU readers are aware of the mortgages available before the real estate and mortgage market meltdowns in 2007 and 2008 that did not verify income, nor in some cases assets, which enabled many self-employed home buyers obtain mortgages. As part of the fallout from the Great Recession, the Dodd-Frank Act was passed which put significant restrictions on how income was qualify for mortgages; essentially income had to be verified as a constant and continuing nature.
For self-employed borrowers this shut down the opportunities to qualify for mortgages for some time as lenders adjusted to create products that would enable this segment of the mortgage market to qualify for home loans.
Over the past year we have seen a dramatic increase in the amount of mortgage products from several different lenders that are geared for self-employed borrowers; opening up opportunities for home ownership and refinances.
These products use different methods for calculating income, but one thing they all have in common is side-stepping reviewing federal income taxes for the prior year(s).
The two most popular programs are:
- For someone receiving a 1099, requesting just the most recent year, or two years 1099 form(s) and deducting a percentage of the gross income on the form as expenses.
- If you own a business requesting bank statements for a period of time (differs on program but most common is one year) and adding up the deposits to calculate income, and then using formula for determining expenses.
Note that almost every program that is does not use tax returns to verify income will require recent bank statements, up to three or six months depending on program, that support the income being used for qualifying. So if the beginning of your year was really good, but the last few months were not, you may have a qualifying issue—though if a case can be made that your income is seasonal, and that can be verified, you can likely qualify.
It is very important to note that if you are going off the conventional guidelines underwriting platforms that you should not expect conventional type interest rates and costs. As well, the underwriting at times can get a bit more clunky with additional requests and changes to the program as the lender reviews the information provided.
As with every borrower, especially those purchasing a home, your transaction will be a lot easier if you begin the process before you start looking for a new home, providing us with all your forms and statements so we can determine the best program for your situation and have it vetted by underwriting before you starting finding your new home.
If you, or someone you know, has non-W2 income and is interested in a mortgage to either purchase a home or refinance, please contact me for more information and options.
Have a question? Ask me!
This week we had data that was positive and negative for markets. Early in the week the Consumer Price Index for June was released showing inflation at its highest, 9.1%, since November 1981*. For the month consumer prices increased 1.3%. This is not very good news for interest rates. However, there was some good news in the “core” CPI data. (Core CPI strips out food, and oil and gas as they are very volatile.) Core CPI has been moving down, while up .7% in June and up 5.9% from a year ago, the core number was 6.5% in March. With food up 1% for the month (and over 12% for the past twelve months), and gasoline up 7.5% (half the increase in CPI) it is evident that, while both are necessities, prices on other goods and services purchased by consumers are seeing price increases slow. With oil prices dropping the last few weeks there is optimism that we will see CPI drop in coming months—this is positive for markets. While glimmers of positivity in the report, overall, the news was negative supporting a big rate hike by the Fed later this month.
*Economic history sidebar for those interested. In November 1981 CPI was dropping from a recent high of 10.95% in September 1981 and on its was to a cycle low of 2.58% in June 1983. It took almost two years for inflation, once it started dropping, to come close to the Fed’s current target rate of 2% inflation. It should also be noted that in September 1981 the Fed’s benchmark rate was 16.42%, in November it was 13.8% and in June 1983 it was 8.75%. The current Fed funds rate is 1.58%. End sidebar.
Very positive for markets and the economy was the retail sales report released today. Consumers, whose spending is approximately 70% of our economy, continue to buy goods and services despite rising costs. They are getting less for their spending, but that are spending. Retail sales rose 1% in June, with the increases coming across a broad range of sectors. While spending at building supply and home furnishing retailers declined, restaurants continue to see growing sales. Markets reacted very positively to the news today as it signals that perhaps the series of large rate increases from the Fed to cool inflation may result in a “soft landing” for the economy and not in a significant recession. “Perhaps” is the operative word that moved markets in a positive direction.
Rates for Friday July 15, 2022: After edging up early in the week, rates took a turn down today on the retail sales number and perhaps a lessening chance of a “hard landing” as inflation is brought down. As can be seen on the chart, rates have been choppy, but until a few weeks ago trending up (for conforming), since with one hiccup the conforming rate is trending down. A long term trend? I’m not betting yes or no but merely a very short-term observation.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 5.125% Down 0.375%
30-year high-balance conforming 5.875% Down 0.125%
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.
In May we flew back to Boston to witness and celebrate our oldest daughter’s graduation from Boston University. On Monday I texted her “Enjoy your first day on the job!” Her job in a lab at Massachusetts General was lined up before graduation, but boss and worker mutually agreed that she would start this past Monday so she could take a trip to Paris with Leslie and then fly out for her old man’s old man 60th birthday.
Mission accomplished, through school, for now, and gainfully employed with no support from mom and dad.
One down, one to go!
Have a great week,
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog