Self-employed people, with a lack of pay stubs or W-2’s, may find it hard to have their income verified when it becomes time to get a home loan. According to the Urban Institute, self-employed people constitute nearly 10 percent of the nation’s workforce and earn more on average than salaried workers, but these workers were hit hardest during the recession, and many are still struggling to gain homeownership. Urban Institute looked at how policymakers such as the Bureau for Consumer Financial Protection (BCFP) may improve these potential buyer’s situations.
Self-employed households have a higher rate of homeownership than salaried households. However, these households were hit the hardest following the recession, and have struggled to gain ground. Despite the high rate of homeownership, self-employed households are now less likely to obtain a mortgage than salaried households.
In 2016, self-employed workers earn a median annual income of self-employed households earned a median $66,900 compared with $56,100 for salaried households. However, these households are more likely to experience income volatility, due to varying incomes month to month.
Urban Institute notes that the January 2019 review of Dodd-Frank should focus partly on the inadequate mortgage market for self-employed households. Despite their higher income, these households were hit harder by the financial crisis and have been slower to recover, and Urban Institute notes that many have not returned to their pre-crisis income levels.
“But part of it reflects the reality that at any income level, both mortgage use and the homeownership rate for self-employed households have declined more than they have for salaried households,” Urban Institute states.
However, non-QM loans are aiming to fill this gap. According to industry estimates Non-QM loans currently represent around 3 percent of the market and are expected to double in size. A majority of non-QM loans are made out for primary residences, especially in California, Florida, Arizona, New Jersey, Texas, Utah, and Colorado. In fact, self-employed individuals represent around 60 percent of the non-QM loan business for mortgage companies like Deephaven, according to estimates.
“We hope the data presented in this brief provide useful insights to the BCFP as it completes its assessment and evaluates potential changes to the qualified mortgage rule,” Urban concludes.
Find the complete report from the Urban Institute here.