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Self-Employed Borrowers Everywhere: Adapting to an Evolving Employment Market

Oftentimes, we think of self-employed individuals as having pretty good lives. Working for themselves, setting their own work schedule, and having a better work-life balance are among some of the benefits we think of when we hear “self-employed.”

But when it comes to applying for a mortgage, self-employed borrowers can be tricky to deal with. A self-employed borrower’s income might not be consistent on a month-to-month basis. Income verification typically takes longer for a self-employed borrower than for a borrower with a W-2. And, as a lender, you usually need to analyze more documentation for a self-employed borrower.

The good news is things are changing to make the mortgage process easier for self-employed borrowers and lenders.

How Are Things Changing?

Let’s lay out the facts:

  • About 1/3 of the U.S. workforce is considered self-employed (Pew Research)
  • Self-employment could triple to 42 million workers by 2020 (Deloitte)
  • Increase in number of self-employed individuals is due in part to the rise of the gig economy – an economy based on short-term agreements such as contracting or freelancing
  • One study estimated there were 68 million freelancers in the U.S. in 2016 (McKinsey)
  • Despite perceptions, only 24% of Millennials reported earning money from the gig economy (Harvard Business Review)

So, what does all this mean? We know there’s a large population of self-employed individuals and people who are earning supplemental income from the gig economy. We also know those numbers will likely increase in the coming years.

As a lender, that means more of the potential borrowers walking through your door are self-employed or earn supplemental income. They bring with them all the challenges we highlighted earlier.

BUT you should see this increasing pool of self-employed borrowers and those with supplemental income as an opportunity rather than an increasing burden.

You won’t be going at it alone – the market is adapting to meet their needs, too. For example, GSE guidelines have recently expanded for self-employed borrowers. Fannie Mae will allow loans to be underwritten with as few as 12 months of income verification for individuals who have short self-employment history.

Improvements in technology mean that AUSs are also getting better at verifying self-employed income. For example, optical character recognition (OCR) technology is making it easier for AUSs to read tax returns and other relevant documents provided by self-employed borrowers. They are also getting better at recognizing what qualifies as taxable income and what’s exempt.

Make Life Easier for You and Your Self-Employed Borrowers

Ok, so guidelines are expanding and technology’s getting faster. But that still begs the question what you can do to help self-employed borrowers close faster?

Make Digital Content Your Friend

To start, list out all the items that frequently stall the closing process when you’re working with self-employed borrowers or borrowers with supplemented income. Do your customers consistently forget one particular document? Are you having to help them work through various numbers to arrive at their qualifying income?

Once you have this list of snags, write a blog post or make an online flier about all the documents self-employed borrowers need during the mortgage application process. The more you can help them be prepared, the faster the approval process will go for everyone.

For example, you could create an online infographic listing out all the information a self-employed borrower would need to complete the mortgage application, like 1099s, Schedule C’s, business bank statements, and month-by-month earnings.

Learn more about creating marketing content for your borrowers in our LO eBook.

Download Now

Training for You and Your Colleagues

Another important step to take is to ensure you’re up-to-date on your self-employed borrower knowledge. Doing so will help you ensure you have everything filled out correctly during the application process, thereby reducing the chance of delays before closing. You can find self-employed borrower training courses that easily fit into your schedule here.

Stay in the Know

And finally, make sure you stay abreast of how the GSEs are handling self-employed borrowers and gig workers. In 2019, Fannie Mae and Freddie Mac both announced their partnership with a technology partner, LoanBeam, which automates the validation process for income. With that technology in place, time to close should decrease. And by coaching self-employed borrowers on what documents they should bring at the beginning of the process, time to close will continue to decrease.

As the way people earn money changes and as technology improves, we’ll certainly see the mortgage application process improve for self-employed borrowers and lenders.

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2 replies
  1. Linda S.
    Linda S. says:

    The 1st 2 points seem to contradict unless self-employment has already increased from 6 million in 2016 to 14 million in 2018/19. I know they’re coming from different sources, so I am wondering how to reconcile those different numbers.

    • Lizzie Farquhar
      Lizzie Farquhar says:

      Hi Linda – yes, we were puzzled by the large gap as well. As you mentioned, one factor is likely the fact that these are two different sources and two different data collection methodologies. Another factor is likely that the Deloitte/WSJ source appears to have a broader definition of self-employed borrowers to include those who are earning all or part of their income from the gig economy. Hope this helps!


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