Strict Covid-Era Mortgage Law Rescinded for Self-Employed Borrowers

The pandemic brought with it many changes in all industries, and the real estate industry is no different. One of the biggest changes involved a new law that was passed relating to self-employed buyers when it comes to the mortgage loan application process. Enacted in June of 2020, two strict laws required borrowers who were self-employed to produce a year-to-date profit and loss statement when applying for a mortgage. The detailed document was required to include proof of revenue as well as a list of expenses and net profit margins. Self-employed borrowers also had to produce their last 2-3 months of bank statements. These were Fannie Mae and Freddie Mac regulations, and were meant to show the strength of the business, in regards to income, to prove that the borrower's business was sound and that they would be able to make necessary payments. Mortgage lenders were required to analyze these documents to ensure that the borrower’s year-to-date income was within narrow margins from the previous year’s tax return income. This applied to anyone who owns at least 25% of their business, or anyone declaring that their income comes from a commission-only schedule C 1099. If the year-to-date income was too far from the expected income based on the previous year’s tax return, an application for a mortgage would be denied.

Though meant to ensure that borrowers could afford their mortgage, these two new laws had the devastating effect of barring millions of self-employed business owners from being able to obtain a mortgage. The laws failed to take into account the seasonality of many businesses, unfortunately. Many businesses appeared to be failing because deposits did not match what Fannie Mae and Freddie Mac said they should be, even though they were strong and may have made up the difference by the end of the tax year. This loophole caused millions to be denied mortgages in the past two years. Many have been frustrated with being unable to take advantage of the historically low interest rates that buyers have been enjoying.

On February 2, 2022 these laws were lifted, making it much easier for self-employed buyers to qualify for a mortgage. The interest rate is rising, currently sitting at 3.55%. This rate is nearly one full point higher than it was one year ago. Undoubtedly, many self-employed borrowers will seek to purchase soon before the rates go even higher.

If you have been denied a mortgage in the past two years because of this law, now is the time to act quickly when thinking of purchasing a home in the Florida Keys. Inventory is low, and prices are rising along with the interest rate. Contact us at Broker’s Edge Realty and let us help you find the right Florida Keys home for sale.