Mountain Mortgage Guy: Loan approval changes could help many self-employed locals (column)
A lot of locals have a little side business in addition to their primary job or might have multiple efforts going at part-time self-employment after hours. For some, it’s a W-2 job in the winter and a self-employed gig in the summer.
Oftentimes the self-employment shows a loss some years, often because self-employment offers a lot of tax deductions that may not really cost the entrepreneur any out-of-pocket cash. These deductions include a home office, writing off a cellphone or mileage that, in reality, entailed looking for opportunities while driving to the grocery store.
Until now, this might have saved on income taxes but created a problem when qualifying for a mortgage loan. Lenders would first add up the W-2 wages but then deduct the amount of the loss from the business venture, and this often made a dramatic difference in how much a borrower could qualify for.
This standard resulted in a lot of part-time self-employed people being ineligible for mortgage loans and caused a lot of frustration for homeowners and homebuyers. More than once I had to council buyers to wait a year and quit taking so dang many deductions and at least break even on paper.
Recently, Freddie Mac, the quasi-government agency that loans the mortgage money that Fannie Mae does not (Fannie is like Freddie, a quasi-governmental agency), took a change of heart on people in the above situation.
This week the “new rule” came out that if a borrower could qualify on his W-2 income alone and also had a loss on the self-employed side, the loss would be disregarded when qualifying for a mortgage loan. This is a very significant change for people who have both wages and self-employment. If the borrower does show a profit, it can be added to his qualifying income, but if he lost money, it would not be deducted.
This rule applies to all Freddie Mac conventional loan programs, even those with 3 percent to 5 percent down payment. As Fannie Mae and Freddie Mac programs generally have nearly identical guidelines, it is expected by many in the mortgage industry that Fannie will follow suit here and adopt the same guidelines in the near future.
This is but one of many examples in recent months of mortgage loan programs realigning with increased confidence in the housing market and the overall economy and the willingness to take chances and increase home ownership opportunities.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.