We’ve talked a lot about economic factors that may be holding back the housing recovery, primarily stagnant wages and pricing issues. But the mortgage difficulties that self-employed borrowers are experiencing could be a previously unrecognized drag on the real estate market.
According to a new study out Thursday, self-employed borrowers are finding it much more difficult to get approved for a mortgage than their salaried peers. These difficulties persist despite higher average incomes among self-employed applicants.
If your primary source of income comes from self-employment, Zillow’s data revealed that you can expect to receive 40% fewer loan quotes compared to traditionally employed borrowers. This is big problem in the Los Angeles real estate market, where a large percentage of the population relies on self employment and freelance jobs in the entertainment industry, particularly in the Hollywood Hills, Beverly Hills, West Hollywood and Studio City neighborhoods. Tighter lending practices will also have an effect on home sales in these and surrounding areas.
Erin Lantz, vice president of mortgages at Zillow said, “It’s still pretty difficult to get a loan. We think it’s even harder for the self-employed.” The reasons she cited for such a disparity in loan quotes, were more complex paperwork to verify income and average lower credit scores among the self-employed.
When seeking a loan through Zillow’s mortgage marketplace, self-employed applicants reported an average annual income of $145,000 compared to $80,000 for others. Yet, self-employed applicants were twice as likely to have a credit score below 680.
Lantz noted that many business owners mix personal and business ledgers, which can lower credit scores and often leads to larger swings and variance in annual income.
“That can come back and impact your ability to buy a house,” she said.
Verifying self-employed income means more work for the lender too, she added. In today’s mortgage marketplace, with rates still at historically low levels, risk-averse banks are looking at self-employed applicants as simply not worth the trouble.
“It’s so much more paperwork intensive,” Lantz said. “Lenders are wary of going through the extra work it takes to underwrite the self-employed.”
But lenders may be not be able to ignore this fast growing segment of the population much longer. Almost 18 million Americans worked 15 hours or more a week as an independent contractor or freelancer, reported a recent study by MBO Partners. That’s a 12.5% gain since 2011.
As the internet makes it easier for workers to compete across geographical boundaries and companies rely more and more on independent contractors because of the costs associated with employees, there is little doubt that self-employment’s rise will continue. Let’s hope lenders come up with a better solution to verify self-employed incomes and cut through some of the red tape associated with these underserved prospective homeowners.
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