Harsh COVID-19 rules rescinded for self-employed borrowers

Fannie Mae and Freddie Mac have eased requirements that business earnings for part of the year match income for all 12 months of the preceding year.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | February 05, 2022

Fannie Mae and Freddie Mac finally eased the two biggest COVID-19 era loan obstacles of the past two years, opening the floodgates for countless self-employed borrowers who were denied loans in the past.

On Wednesday, Feb. 2, the mortgage giants rescinded the rules imposed in June 2020 requiring self-employed borrowers to provide a year-to-date profit-and-loss statement reporting revenue, expenses and net income as well as their most recent two or three months of bank statements.

Fan and Fred required lenders to make sure your current year-to-date income was on par with the previous full year of tax return income. For example, if your previous years’ net income was $240,000 (or $20,000 per month), then the current year’s net income for January through September should be roughly $180,000 (9 x $20,000). If you fell too far below that line, you were deemed to be circling the drain. No loan for you.

If you own 25% or more of your business, or your income is derived from schedule C income through 1099 commission-only income, this means you.

It’s all about risk assessment, according to the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. The powers that be decided the P & L and bank statements provided a good snapshot of your business’ financial health during the pandemic.

And their policies impact mortgage lenders that sell loans to Fan and Fred.

I side with those who believe the rule was based on flawed thinking.

For example, customer payment seasonality crushed a lot of self-employed borrowers, even though their businesses were sound. Since revenue deposits didn’t square-up on Fan-Fred’s timeline, business income looked poor. But, by tax return time, they looked good — as always.

What about Payment Protection Plan money for hard-hit industries like hospitality? The rules did not allow lenders to recognize those deposits.

If that profit-and-loss bank statement rule was such a good idea in the first place, why wasn’t it there pre-COVID? And why remove the rule from the COVID-19 playbook now? Who thinks COVID is behind us?

At any rate, the rule cost a lot of self-employed borrowers the golden opportunity to take advantage of some of the lowest interest rates on record.

Freddie Mac’s loan survey showed the 30-year fixed rate at an all-time low of 2.65% in January 2021. This week, rates averaged 3.55%, almost one full percent higher from a year ago. And half a percentage point above the 2021 average of 2.98%.

Mortgage brokers like me had to turn down countless capable borrowers because they didn’t fit that interim financial box. And, mortgage lenders were too scared Fan or Fred would make them buy back mortgages should the P & L income not match up to a year ago.

But there’s still time to take advantage of this rule change before rates go higher.

Did you get denied a mortgage over your profit and loss statement after June 2020? Or did you end up taking out a more expensive financial instrument from the exotic mortgage menu? You might want to take another bite at the cheaper Fannie, Freddie mortgage application apple. You still have some rigor ahead of you, but it’s a lot less than what it was on Feb. 1.

Freddie Mac rate news: The 30-year fixed rate averaged 3.55%, unchanged from last week. The 15-year fixed rate averaged 2.77%, down 3 basis points from last week.

The Mortgage Bankers Association reported a 12% increase in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $289 less than this week’s payment of $2,924.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 3.125%, a 15-year conventional at 2.75%, a 30-year conventional at 3.5%, a 15-year conventional high-balance ($647,201 to $970,800) at 3.125%, a 30-year conventional high-balance at 3.75% and a 30-year fixed jumbo at 3.625%.

Eye catcher loan of the week: A 30-year adjustable jumbo mortgage, locked for the first 10-years at 2.99% without points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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Jeff Lazerson - Mortgage Columnist since 2011