New Document Rules Could Help Self-Employed Mortgage Shoppers Get Approved

A bipartisan Senate bill introduced in August 2018 could make it easier for self-employed and “gig economy” workers to qualify for mortgage loans, by allowing lenders to use more documents during the underwriting process.

Self-employed home buyers tend to encounter more hoops and hurdles when shopping for a mortgage loan, and much of it has to do with documentation. Self-employed workers sometimes lack the income-related documents of a person with traditional employment. And this can make it harder for them to prove their income.

A new piece of legislation working its way through the Senate could change that. If passed, it would allow mortgage lenders to use additional documents (like the IRS form 1040) when reviewing mortgage loan applications from self-employed borrowers.

More Documents Allowed for Self-Employed Mortgage Shoppers

In August 2018, U.S. Senators Mark R. Warner (D-VA) and Mike Rounds (R-SD) introduced a bill that is officially known as the Self-Employed Mortgage Access Act of 2018. And its name signals its intent. The proposed legislation is designed to boost mortgage access among self-employed workers and “other creditworthy individuals with non-traditional forms of income.”

It would do this, in theory, by allowing lenders to use a broader range of documents when considering loan applications.

The Self-Employed Mortgage Access Act would allow mortgage lenders to use the following documents:

  • IRS Form 1040 Schedule C for sole proprietorships
  • IRS Form 1040 Schedule F for farming industry workers
  • IRS Form 1065 Schedule K-1 for partnerships
  • IRS Form 1120-S for S Corporation workers

We should clarify at this point that self-employed mortgage shoppers can qualify for financing — even under today’s guidelines. It happens all the time. But they often have to jump through additional paperwork hoops along the way.

Banks and lenders frequently request profit-and-loss (P&L) statements from self-employed mortgage applicants, as well as other documents that traditionally employed borrowers do not have to provide. The changes being proposed in this bill could simplify the path to mortgage approval.

According to Senator Warner, one of the bill’s proponents:

“An increasing number of Americans make their living through alternative work arrangements, like gig work or self-employment. Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income — paystubs or a W-2 — as someone who works 9-to-5.”

This bill is designed to alleviate some of those document-related issues, thereby increasing mortgage access for self-employed borrowers.

Supported by Key Industry and Consumer Groups

Most legislation proposed at the federal level has to be approved by members of both the Senate and House, and then be signed into law by the president. To date, this bill has only been introduced within the Senate. So it has a ways to go.

But it also has some momentum behind it, which could lead to an eventual passage. For one thing, it is being supported by key industry groups (i.e., lobbyists) such as the Mortgage Bankers Association. Even a few consumer advocacy groups have voiced their support.

Barry Zigas, Director of Housing at the Consumer Federation of America, said the Self-Employed Mortgage Access Act “would provide common sense direction to the [Consumer Financial Protection Bureau] in its application of the statutory requirements and give lenders and consumers alike an easier, less burdensome way to meet these tests.”

Typically, when a piece of legislation has broad support and few detractors, it eventually becomes law. But only time will tell. We are monitoring this bill and will report on any new developments as they arise.

The key takeaway here is that, if passed, this bill could ease the requirements for self-employed borrowers seeking a mortgage loan. It would allow them to provide alternative documents to verify their income. And that seems like a positive change.