Mortgaging While Self-Employed Gets Easier

Americans who are self-employed and freelance or contract workers have long had to struggle to qualify for a mortgage compared with those with W2 forms or pay stubs that lenders can use to verify their incomes. For the self-employed, the mortgage process can be time-consuming and cumbersome. Lenders often require extra paperwork, such as full documentation of tax returns from the last couple of years (not just the electronic copy submitted to the IRS). Even after that, the person may still lack an income steady enough to qualify or face extra fees once they are approved.

However, mortgage financing giants Freddie Mac and Fannie Mae have recently made changes to an automated system that could help more self-employed individuals qualify for a mortgage. The new technology automates underwriting for loan applicants who are self-employed or have side income. “Applications that previously would have taken days to analyze and verify may now take just minutes, thanks to the use of optical character recognition technology that reads tax returns, identifies what qualifies as eligible income, and integrates it into both companies’ electronic underwriting systems,” reports Kenneth Harney, a syndicated real estate columnist for The Washington Post.

This frees lenders from having to comb through tax documents and allows them to find the information they need in minutes. The new system now takes three to five days to process, which slashes hundreds of dollars in costs and trims the risk for the lender, Andy Higginbotham, a Freddie Mac senior vice president, told The Washington Post.

There were about 15 million self-employed individuals in 2015 – which equates to about one of every 10 people in the workforce, according to the U.S. Bureau of Labor Statistics. Adding automation to the mortgage approval process could give potential home buyers greater confidence as they shop for a home, says Josh Moffitt, president of Silverton Mortgage in Atlanta. It also could help with meeting contingency-clause financing deadlines in contracts.

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Still, the programs are new, so not all lenders may offer this automated income verification to self-employed applicants yet. But housing experts say it may be valuable to self-employed individuals to find those that do.

Wave of Millennial Home Buyers Tightens Starter-Home Market

It’s about to get even harder for Millennials to buy their first homes. Nearly 45 million Americans will reach the typical age for first-time home buyers within the next 10 years, 3.1 million more than the past decade, creating stumbling blocks in an already challenging market for those racing for a spot in the starter home market.

The median first-time home buyer in the U.S. is 34 years old, according to online real estate market place Zillow. There are 44.9 million Americans ages 24-33, or potential future first-time home buyers, compared with 41.8 million people ages 35-44, or potential past first-time home buyers, a 7.4% increase.

For the past several years, a tight supply of starter homes has been a barrier for young potential home buyers. Starter homes have gained 57.3% in value over the past five years, a median increase of $47,600 while for-sale inventory in this price range has dropped 23.2%, Zillow reports. Over the same period, the most expensive third of starter homes gained 26% in value, and home in the middle third appreciated 36.8%.

Though the current housing market is cooling off, this coming wave of buyers faces a future starter-home market with now-familiar dynamics: relatively high demand and low supply, in which the stiff competition among buyers worsens the affordability issues caused by rising price.

“The decision to buy a house is frequently linked to people wanting room for children, maybe wanting to get a yard for their kids,’ say Zillow economist Jeff Tucker.

Other reasons Millennials might want to own a home include security, independence, building equity, stability and financial flexibility, according to a recent survey by Mr. Cooper, the nation’s largest non-bank mortgage servicer and a leading mortgage lender.

But saving for a down payment can be an uphill battle for first-time buyers. In fact, a recent Zillow analysis found that buyers need 1.5 years longer to save for a down payment than they did 30 years ago and to secure a loan. Nearly four times as many first-time buyers who obtained a mortgage last year were denied at least once (29%) compared to repeat buyers (8%).

The Mr. Cooper report found that 58% of aspiring homeowners lack of funds for a down payment; nearly half (43%) don’t have a financial plan in place to purchase a home someday; 75% would be willing to work a side job if it meaning owning a home sooner; and 36% would have a roommate if it meant being able to afford a home sooner.

Some markets provide better conditions than others for first-time buyers with a combination of lower home values, strong appreciation forecasts, available supply and a high share of listings with a price cut.

The three best markets for first-time home buyers in the 2019 home shopping season are Tampa, Las Vegas and Phoenix.

“These are relatively affordable markets with median home values well under $300,000,” says Tucker. “We’ve also seen a large fraction of listings with price cuts. That’s good news for first-time home buyers. It means that buyers have a little more bargaining power.”

San Diego and Boston are expected to see the largest jumps in potential first-time buyers. Both metros will see a nearly 20% increase in the next wave of potential first-time home buyers compared with the previous wave, according to Zillow.

“Boston and San Diego will have the biggest fraction of people hitting that median first-time buyer age, 34, than anywhere else in the country,” says Tucker, adding: “One caveat there, though, is people are always free to move. So if people find that as they age into their mid-30s and look around to buy a home, they could find that it might be too expensive to find the home they would like to live in Boston or San Diego. And so at the metro level, it’s a little harder to predict the future without a crystal ball. Just because somebody is a 30-year-old in Boston today, you know they will be 34 in four years, but we don’t know where they are going to live in four years.” Who buys houses in Hialeah.

Buyers making a transition from renting to homeownership help ease rental demand, which holds down rent-price growth. But Tucker acknowledges the other side of the coin, saying “if this coming wave of buyers has to compete fiercely for homes to purchase, that could drive up rent prices as well as home values.”