For years, federal lending rules have favored applicants with easily documentable incomes — people who can show underwriters pay stubs, W-2s and two years of steady income plus the likelihood that it will continue. The same rules have made it challenging for people who work for themselves, earn money at multiple jobs or have big seasonal swings in what they earn.
Say you’re a Lyft driver and you run a cash-intensive food-truck business on the side. You earn good money and you have decent credit scores and savings, but your income jumps around from month to month depending on sales. You’re likely to have a hard time convincing lenders about your total income: It’s not steady, and at least some of it can be difficult to document. Your loan officer may end up saying, sorry, I can’t fit your income pattern into the boxes mandated by federal qualified-mortgage (QM) regulations, so I just can’t do your loan.
This may not knock you out of the mortgage market entirely, but it could force you to pay a higher interest rate or make a larger down payment elsewhere using a lender that offers non-qualified mortgages on less-favorable terms.
Enter the Self-Employed Mortgage Access Act, co-sponsored by Sens. Mark R. Warner (D-Va.) and Mike Rounds (R-S.D.). It would expand lenders’ permissible sources to verify incomes beyond the relatively narrow range specified in current QM regulations. According to Warner, as many as 42 million Americans — roughly 30 percent of the workforce — are self-employed or in the gig economy.
“Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income — pay stubs or W-2s — as someone who works 9 to 5,” said Warner in introducing the bill.
Mortgage lenders say applications from buyers with nontraditional income patterns are a growing issue. “I deal with a lot of people who fall out of the guidelines,” says Don Calcaterra Jr., owner of Local Lending Group in Troy, Mich. Calcaterra told me about a recent client who moved from being a W-2 employee to independent contractor status. She couldn’t show two years of steady income in her current role, couldn’t wait for two years to qualify to buy the house she needed, and ultimately couldn’t fit into current federally prescribed income rules.
Related: [Is the gig economy a myth?]
Calcaterra’s firm does commercial lending as well as home mortgages. He says it’s ironic, but “it’s now easier to do a $5 million commercial loan than it is” to do a small QM mortgage for a person with nontraditional income — even if the home buyer is a good credit risk based on assets and down-payment cash.
Pete Mills, senior vice president for residential policy at the Mortgage Bankers Association, offered an example of how QM rules are overly prescriptive: An auto-industry worker wanted to buy a home using his full-time employment income and earnings from a small sideline business — a recent partnership he formed with a friend to sell vegetables at a farmers market. Because of start-up-cost deductions, the partnership claimed a $500 tax loss for its first year on IRS Schedule 1040E. Ultimately, the applicant was forced to use only his regular employment income for the mortgage, because QM-rule requirements to substantiate the $500 in losses were excessive: two years of federal tax statements, a year-to-date profit-and-loss statement and a balance sheet for the business.
Mills called the current rules “well intentioned” but “antiquated.” Prospects for the Warner-Rounds bill? Mills said he expects House sponsors to offer their version of the Senate bill soon. Given the bipartisan nature of the proposal and the breadth of constituents affected, he thinks the legislation has an excellent chance, though probably not until next year’s congressional session.
Meanwhile, the two largest sources of mortgage money in the country, investors Fannie Mae and Freddie Mac, are actively exploring ways to more fairly underwrite self-employed and gig-economy applicants. A Freddie Mac official told me the focus is on automated solutions that would be able to document the incomes typical for self-employed and gig-economy workers.
Bottom line: Remedies are in the works — and they could come in the months ahead.
Ken Harney’s email address is email@example.com.