Just Approved: COVID-19 era underwriting makes qualification troublesome for self-employed, contractors
Loan officer: John Holmgren, Holmgren & Associates/Finance of America Mortgage.
Property type: Single-family home in Mission Viejo.
Home value: $675,000.
Loan type: 30-year fixed rate loan.
Loan amount: $485,000.
Rate: 3.125% with no points.
The pandemic has caused the mortgage agencies, Fannie Mae and Freddie Mac, to adopt additional underwriting requirements for borrowers who do not have stable, traditional employment. Specifically, these borrowers are required to prove that their income has continued despite the limitations in face-to-face contact resulting from government-mandated shelter in place rules.
In this case my client, a southern California dentist with a long-standing practice, wanted to refinance his home loan to take advantage of historic low interest rates. Normally his qualification would have been based on an evaluation of his net cash flow from the last two years tax returns, accompanied by an informal profit/loss statement for the current calendar year.
However, because his profession was affected by pandemic restrictions such that only essential services were to be performed (i.e. dental emergencies in this case) we were also required to document the cash flow of his dental practice via business bank statements showing ongoing cash flow. Needless to say, the bank statements starting in April of 2020 showed a sharp reduction in revenue.
We were able to demonstrate with the dental practice bank statements that revenue had picked up again starting in June and increased in July. While it was clear that the revenue in those two months did not match the historic revenue of the practice, in light of the established nature of the client’s dental practice the underwriter was convinced that revenue was on track to return to normalcy.
Similar situations for other workers are more troublesome, as many service providers such as salon workers, massage therapists, and many other employment categories, have not been able to restore a revenue stream that remotely approaches pre-pandemic levels. It is understandable, but regrettable, that government efforts to deter contagion have had the unintended consequence of preventing many homeowners from taking advantage of historic low rates to permanently improve their financial positions.
John Holmgren, Holmgren & Associates/Finance of America Mortgage, 510-381-1961, [email protected]