Parkes Dibble: Working with Self-Employed and Underserved

Parkes Dibble is the director of mortgage product innovation at Embrace Home Loans, a prominent mortgage lender licensed in 48 states and the District of Columbia. He leads efforts to strengthen product depth and breadth and further transform the lender’s retail lending products. Dibble has more than 35 years’ experience in the mortgage industry and has held a variety of executive and leadership roles. He can be reached at pdibble@embracehomeloans.com.

Traditionally, when a mortgage lender first met with a homebuyer, they expected the homebuyer to come equipped with proof of a consistent, steady paycheck from an employer whom they had been working for full-time for years.

Today, mortgage lenders are almost as likely to meet a potential homebuyer who is self-employed, or part of the gig economy. According to a study from the Freelancers Union Freelancing in America: 2019, 57 million Americans—or 35 percent of the US workforce-are self-employed.

And that number is only expected to grow. The State of Independence Survey by MBO Partners projects that by the year 2023 more than half of the American workforce will either be gig economy workers or will work independently for at least some of their income. The 2019 Freelancer Union study showed that the younger the worker, the more likely they are to freelance.  Consider these statistics: 29 percent of Baby Boomers freelanced in the past year, 31 percent of Gen X workers freelanced, 40 percent of Millennial workers freelanced and 53 percent of Gen Z workers freelanced—the highest independent workforce participation of any age bracket since the study’s 2014 launch. 

It’s clear that self-employed workers are on the rise and that trend will continue for the foreseeable future. To keep pace, mortgage lenders and professionals need to make sure they are equipped to meet the demand of this growing segment.

Income Factors

Gig economy workers seeking to purchase a home likely won’t qualify for a mortgage according to traditional mortgage underwriting practices. Their income can be sporadic, or they may have multiple sources of income that aren’t as easy to identify or verify as income reported on a W-2. Many lenders want to see stable and easily traceable income from paychecks and two years of W-2s or tax returns

But there are lenders equipped with products designed to help the self-employed qualify for a loan by using cash flow from bank statements instead of what is reported on tax returns. As a mortgage professional or a real estate agent, the last thing you want to do is tell a client they shouldn’t be looking for a home just because they’re self-employed and may not be able to qualify for a mortgage. Knowledgeable mortgage originators with access to non-traditional mortgage options have a great opportunity to educate and establish good relationships with real estate agents who have a growing self-employed client base.  

Are Unconventional Mortgages Riskier?

When it comes to home financing, unconventional shouldn’t mean unqualified. There are a great number of prospective homebuyers with great incomes who pose little to no credit risk, yet they don’t qualify for a conventional mortgage as defined by the qualified mortgage (QM) rule.  But non-QM shouldn’t imply that a borrower is a bad risk. Lenders can help borrowers with non-traditional income qualify for traditional financing with the right products – and do so safely.

Unlike the subprime loans that contributed to the mortgage meltdown more than a decade ago, today’s non-QM loans are less risky for lenders and still allow borrowers with non-traditional incomes to qualify. Underwriting is stringent and done manually for non-QM loans, so all documentation is reviewed carefully. Also, the market has become more homogenous for loan purchasers in the secondary and capital markets for both product and price. The fact is, these non-traditional mortgage loans have documented income and reserves. These factors make today’s non-traditional loans much safer than the subprime mortgages of the past.

Risk factors such as low FICO scores, high debt-to-income (DTI) ratios, small down payments and unverified incomes all heaped together are not allowed today, even with non-agency loans. That sort of risk layering went away with the old subprime mortgages. However, making a large down payment and having plenty of money in the bank can help a borrower’s approval for non-agency loans, even with things like bankruptcy, foreclosure, loan modification, or other negative events that have impacted their credit. Non-QM loans have helped many borrowers who can show other positive credit attributes overcome the low FICO score roadblock. We’ve even seen approvals for FICO scores under 600.

Unconventional Properties and Borrowers

Another major misconception is that unconventional properties are an issue with non-traditional mortgages. This is simply not true. In fact, we’ve seen many instances where borrowers were able to purchase properties with unique characteristics.

Things like large acreage or even non-warrantable condominium projects don’t have to be deal breakers for borrowers. Yet, banks often turndown their applications, especially when a jumbo mortgage is needed, due to lack of income shown on tax returns. With a non-traditional loan, we can often approve a mortgage based on 24 months of bank statements and no tax returns, and close in less than two months.

There are even loan programs for medical professionals who are moving to a new area and want to buy a home, but don’t start until after the loan closing. Loan programs are available with as little as three percent down for loan amounts up to $2 million. “Future income” is acceptable with a start date 60 to 90 days from the closing date.

The point here is that people who know they have plenty of income to make monthly mortgage payments on a home or property should not feel that there’s no hope of getting a home loan. It’s a matter of finding the right lender that offers the right non-traditional mortgage option to fit their unique circumstances. Bank statements can usually confirm income and ability to repay, so self-employed borrowers should know there are some lenders who can and will approve.

Mortgage lenders and originators need to take note of the growing population of the self-employed. It’s not hard to understand the mortgage qualification challenges this group faces, so it’s important to be able to offer alternative loan options for them. And the ability to do so not only helps the borrower, it improves and expands the lender’s business. After all, don’t gig economy workers deserve to experience the dream of homeownership, too?

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)