Self-employed borrowers still struggle to qualify for government-backed loans

Pandemic-era rules penalizing self-employed borrowers for income drops remain in effect.

By Jeff Lazerson | | | June 12, 2021

Last week, Fannie Mae started a new program named Refi Now to help low-income borrowers with high debt qualify for a mortgage.

The standard for well-qualified borrowers is debt should amount to less than 50% of their income. Under Refi Now, qualifying debt-to-income ratios rise to an astronomical 65%.

Ok. Fair enough. But how about also cutting a break for self-employed borrowers with high debt?

It looks like the answer for them is Refi Never.

Draconian COVID-19 self-employment underwriting restrictions from Fannie Mae (and Freddie Mac) implemented exactly one year ago still stand today.

The COVID focus became all about your business then and right now.

In addition to providing at least one year’s business tax returns, borrowers were required to provide interim financial statements.

Year-to-date profit-and-loss statements had to stay on pace with last year’s income. Underwriters assumed year-to-date income dips indicated the borrowers’ business was circling the drain. Deny credit now. Abort.

The new rules killed the prospects for getting cheaper mortgage for too many.

For example, my shop turned away roughly half of self-employed borrowers because they could not qualify for a loan. Yes, half.

Year-to-date profit and loss statements became an underwriting obsession. Some lenders allowed no tolerance for an income dip. Others said no dice with more than a 10% dip. And at least one lender I know of allows up to a 25% dip so long as the borrower still qualifies with the income dip.

Worthy purchase and refinance borrowers wanting cheap Fannie and Freddie rates were also required to walk their mortgage loan originators through the granular details of the business bank statements that coincided with their P&L’s. What better truth serum for Fannie and Freddie than something bordering on a forensic audit?

Self-employed applicants were offended by the scrutiny. It was like a financial cavity search. But they put up with it because they wanted the lowest mortgage rates in modern history.

Others just said no. A few expressed their anger in words unacceptable to provide to you.

How else could lenders decipher the financially strong applicants from the weak ones? Better safe than sorry in the eyes of F & F.

Yes, plenty of businesses crashed, burned and shut down. But plenty have survived and thrived through good fortune or government support like the PPP program.

Business bankruptcy attorney Richard Golubow of Winthrop, Golubow and Hollander pointed out that less gross revenue can still translate to more profits due to less travel, reduced office overhead and no entertainment expenses during COVID.

“People worked harder,” said Golubow.

Business bankruptcy filings are trending down. The U.S. saw Chapter 11 and Chapter 13 business bankruptcy filings decrease about 19% in 2020 from the year before, according to Epiq AACER Bankruptcy Information Services. Year-to-date, 2021 filings are down more than 30%.

California business BK numbers were down about 40% in 2020, with filings down another 10% this year so far, Epiq AACER figures show.

As of this week, mortgage forbearances are down to 4.16%, according to the Mortgage Bankers Association. Forbearance numbers were 8.55% one year ago.

More than 14 million borrowers could save an average of $283 per month by refinancing, according to mortgage data firm Black Knight. California has almost 1.9 million of those candidates who could save an average of $386 per month. The counties of Los Angeles, Orange, Riverside and San Bernardino have 952,000 borrowers who are ripe for refinancing.

How many are self-employed borrowers whom Fannie and Freddie could assist?

Officials with mortgage regulator Federal Housing Finance Agency couldn’t be reached for comment about whether Fan and Fred will go back to the pre-COVID self-employment underwriting rules.

Freddie Mac rate news: The 30-year fixed rate averaged 2.96%, 3 basis points lower than last week. The 15-year fixed rate averaged 2.23%, 4 basis points down from last week.

The Mortgage Bankers Association reported a 3.1% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $74 more than this week’s payment of $2,300.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.25%, a 15-year conventional at 1.99%, a 30-year conventional at 2.625%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.125%, a 30-year conventional high-balance at 2.75% and a jumbo 30-year fixed at 2.75%.

Eye catcher loan of the week: A 30-year fixed at 3% without cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or His website is

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

Get a Quote

Sample Image

Jeff Lazerson - Mortgage Columnist since 2011