What's a self employed person to do?

Question

I just called my mortgage company to inquire about refinancing my mortgage and was told that lenders are not giving loans to anyone who is self-employed due to the pandemic. This is ridiculous! My income has remained strong and is even more than last year! I work in health care.

Has anyone else found mortgage companies with good rates who will work with self-employed investors?

Chris Mason · Answer

What @Shaun Weeks said is correct.

To give it more context:

The entire mortgage industry is at capacity right now, has been since March, with the functionally unlimited numbers of fish in a barrel refinances. A loan originator friend of mine and I were having a friendly debate a few months back, and he won: by picking up the phone and randomly dialing 20 random California area code phone numbers, he was in fact able to put >2 more refinances in his pipeline. When in human history has completely random cold-calling ever had a >10% conversion rate (cold calling = ew, gross... but still)?

One way a bank or mortgage company can open up capacity (to do more loans, to realize more profits, etc) is by cutting off loans to borrowers that are statistically likely to take more time to underwrite/process/etc on some basis, or bases, other than legally protected class(es).

Self employed folks take longer to process/underwrite (50% to 100% more person-hours), and that's not a protected class. So if you're just focused on quarterly numbers, rather than relationships and "fuzzy" things like that, it's rational to cut self employed people off.

Here is a real life example of that sort of "capacity management" in action, from the largest lender in the country (by volume, 2019).

Do you see where it "does not impact IRRRLs or FHA Streamlines"? That's b/c those take 50% to 75% less time to process/underwrite than "vanilla" loans. Same exact mechanism and logic. FICO scores also aren't a protected class, so you can lawfully discriminate on that basis as well, in this case having a ridiculous minimum FICO score, but only for self employed people.

Another IRL example. Another lender charges 1 extra discount point to anyone self employed, and another 0.5 if rental income is going to be used. So in that case they will do it, but only if it's going to be an unusually high profit loan.

Thanksgiving just happened. I am thankful that my crystal ball told me to go be a mortgage broker a couple years back, having been a direct lender for the entirety of my career previously. That optionality from working with a bunch of different lenders, right now, is essential.

Andrew Postell · Answer

@Kirsten Milliken it sounds like you're on the right track here. But if anything changes with your current direction I would suggest we need some good local people to weigh in here on who's a good lender in your area.

Here's my 3 suggestions:

• Post in the Bigger Pockets STATE forum that you are looking in. There are usually some good, local investors that monitor those forums. Maybe they already have a suggestion or recommendation for you? Certainly try there.
• Visit your local REI groups. There are many groups that meet across the country. Some post here on the Bigger Pockets Marketplace. Many post on meetup.com. Networking is always a great practice and you never know who you might meet there and what good information they have to share. Would certainly recommend visiting if one is close to you.
• Calling - and then there's this option. Which is what I have had to do many times...it stinks.  Try to other two first.

Hope this helps!

Shaun Weekes · Answer

The statement made by the lender is incorrect.  Fannie Mae and Freddie Mac are still buying loans with borrowers who are self employed.  You have to jump through some extra hoops but its still a go if you qualify and meet the new guidelines.

Most lenders are now asking for 3 months of business bank statements and a P&L verifying the monthly averages of previous years income.  Example; 2019 you showed 120K in taxable income, so your P&L should reflect 10K or more a month and those 3 months of bank statements should support the P&L. Lenders also have different requirements depending on your entities structure so be sure to go over this with your broker or loan officer.

I hope this helps and have a great day.

Joe Splitrock · Answer

Yes a 20 years business is just as good as W2. It sounds like the mortgage broker was just being dismissive. In general self employed can add a couple extra steps, so sounds like they were just being lazy. Their loss.

Kirsten Milliken · Answer

@Stephen E.I called Better.com.  They had no problem with me being self employed.  We will see what happens.

Kirsten Milliken · Answer

@Shaun Weekes- that has been my experience in the past and what I expected this time.  I'll call a different lender. Thank you!

Andrew Postell · Answer

@Kirsten Milliken Awesome!  Very glad to hear it.  Local usually works better.  Thanks for posting!

Kirsten Milliken · Answer

@Andrew Postell I ended up using a local bank and got a great rate with 30 day closing!

Timothy Hero · Answer

Self-employed people get financing day and night. This is why non-qm lenders exist. I assume it's for a rental? Where at?

Kirsten Milliken · Answer

@Steve Orluski can I borrow your wife?

What's a self employed person to do?

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