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When Income Isn’t Enough for Homeownership

Self-employment may provide some professionals a sense of freedom and control they may not feel in full-time salaried positions; but when it comes to purchasing a home, these professionals may have fewer options than their salaried counterparts.

In the years leading up to the Great Recession, self-employed households had higher homeownership rates than salaried households; but today the tables have turned, according to new research from the Urban Institute.

The housing crisis took a greater toll on self-employed households than on salaried households. Homeownership and mortgage use fell more among the self-employed than among those earning regular salaries, according to the research.

“The mortgage market is not adequately meeting the lending needs of self-employed households,” stated Karan Kaul and Laurie Goodman in a blog post on the Urban Wire.

With 8.5 percent of all U.S. households headed by a self-employed professional, the researchers stated, “self-employed Americans are too large a segment of the economy to be left behind in mortgage access.”

Looking back, we see that the self-employed households had higher incomes, higher homeownership rates, and identical mortgage use rates to salaried homeowners. The housing crisis caused a shift the self-employed haven’t fully recovered from.

Between 2001 and 2007, the median income for self-employed households was $71,800, compared to $55,300 for salaried households. While incomes of salaried households are nearly back to their 2007 levels, self-employed households have not recovered as much ground.

Over the same time period, from 2001 to 2007, self-employed households had a homeownership rate of 79.2 percent, a notable 13.4 percentage points higher than that of salaried households.

As of 2016, that gap narrowed to 10.2 percentage points, and the homeownership rate for the self-employed was 72.9 percent.

Also, while mortgage use declined for both salaried and self-employed households, the Urban Institute found that it has declined more among self-employed households.

In 2007, 80 percent of both salaried and self-employed homebuyers obtained a mortgage loan. As of 2016, 74 percent of salaried homebuyers used a mortgage compared to just 67 percent of self-employed buyers. That’s a 13 percentage point drop for self-employed compared to a 6 percentage point drop for salaried buyers.

While the researchers do not have data on how self-employed homebuyers who do not obtain a mortgage finance their homes, Kaul said in an email, "One possibility is they are wealthy self-employed folks (restaurant or gas station owners types) who may not need to borrow."

While lower incomes might account for some of the drops in homeownership and mortgage use among the self-employed, the researchers point out that even when taking a look at just higher-income households, mortgage use has declined more for self-employed buyers than for salaried buyers. Comparing 2007 to 2016, mortgage use is down 5 percentage points for salaried homeowners earning more than $70,000 per year and down 9 percentage points for self-employed owners in the same income bracket.

The culprit, according to the researchers, is “tougher mortgage availability or requirements” faced by self-employed homebuyers when applying for mortgage loans.

“Absent major changes to mortgage eligibility rules, the homeownership gap between salaried and self-employed households will likely persist or even widen in the coming years,” Kaul and Goodman said.

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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