Q&A: New COVID-19 mortgage rules for self-employed borrowers

Freddie Mac’s and Fannie Mae’s announcement about stricter guidelines has made it tougher for the self-employed to qualify for a mortgage. We ask our VP of Origination, George Fraguio to give his take on these new guidelines.

What’s the reason for these stricter requirements?

The main issue is based on quality of income going forward without any government assistance. With COVID-19’s devastating impact on small businesses across the country, future patterns of income stability by a self employed borrower will be even more scrutinized because of the precarious nature of being a small business owner during a pandemic amid government assistance.

What are the new hurdles that self-employed and business owners are currently facing?

Primarily it’s based on the nature of self employed borrowers receiving SBA PPP Loan proceeds to prop up their business and that lenders will not accept these on the ledger as assets but as incurred debt. That will place pressure on the business balance sheet and on self employed borrowers that can’t withstand the downturn on their own business prospect. Chances are that if you took out a PPP loan for your business you might not qualify for a home loan.

Regarding Government stimulus, are lenders considering Paycheck Protection Program loans as collateral?

No - absolutely not- proceeds from PPP are considered debt on the balance sheet.

How have borrowers reacted to these new guidelines?

It’s still early to tell. Some self employed borrower's will have to look for either emerging new NON QM loans that are slowly coming back online or Bridge lending for investment properties. At the end of the day these new guidelines are to curb abuses of the uses of proceeds from these emergency funds. Self Employed borrowers need to be aware that the proceeds are to keep their business open and not to enhance their ability to either purchase or refinance their homes.

What recommendations can you give self-employed and small business before applying for a mortgage?

If they received PPP funds, they should discuss with their CPA or tax consultant the impact it has on their overall ability to qualify for a mortgage- especially if from proceeds they paid themselves an advance or received a significant amount of personal compensation From proceeds of a PPP loan. If they have not received PPP funds, they should reach out to a mortgage professional and get pre-qualified.