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Bill Would Simplify Mortgage Process for Self-Employed Borrowers in California

Summary: A bill introduced in the Senate recently would theoretically make it easier for self-employed home buyers in California to get mortgage loans.

In August 2018, a pair of U.S. senators introduced a piece of legislation that could make it easier for self-employed borrowers in California to qualify for mortgage loans. It’s a significant development, because there are thousands of self-employed and “gig economy” workers across the state of California.

Specifically, this bill would allow mortgage lenders to use alternative documents when underwriting home loans. “Alternative” in this context refers to other documents beyond the traditional W-2 form that’s commonly used in the mortgage industry.

Related: Bank statement loans for self-employed

An Easier Mortgage Path for Self-Employed Borrowers in California?

Last month, U.S. Senators Mike Rounds (R-SD) and Mark R. Warner (D-VA) brought a new piece of legislation onto the Senate floor. It’s officially known as the Self-Employed Mortgage Access Act of 2018.

If passed, the bipartisan bill would broaden access to mortgage loans for California’s self-employed workers as well as “other creditworthy individuals with non-traditional forms of income.” It would allow these individuals to use alternative documents when applying for a home loan.

This act would make the following documents acceptable for mortgage underwriting:

  • IRS Form 1040 Schedule C for sole proprietorships
  • IRS Form 1040 Schedule F for farming workers
  • IRS Form 1065 Schedule K-1 for partnerships
  • IRS Form 1120-S for S Corporations

As you can see, the bill is designed to help a variety of self-employed individuals ranging from sole proprietors to S corporations.

To be clear: It’s entirely possible for self-employed borrowers in California to qualify for mortgage financing, even today. But they sometimes have to jump through some additional paperwork “hoops” due to a lack of traditional income documentation.

And that’s where this bill could prove helpful. It would essentially simplify the path to mortgage approval for self-employed workers, sole proprietors, “gig economy” workers, and the like.

Designed to Help Those With ‘Alternative Work Arrangements’

Senator Warner’s research determined that some creditworthy borrowers are having a hard time qualifying for mortgage loans these days simply because they are self-employed. Borrowers in this situation often lack some of the income-related documents that are widely used in the mortgage industry.

“An increasing number of Americans make their living through alternative work arrangements, like gig work or self-employment,” Warner said. “Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income — paystubs or a W-2 — as someone who works 9-to-5.”

The Self-Employed Mortgage Access Act of 2018, introduced by Warner and Rounds, is designed to alleviate some of these issues by allowing for a broader range of income-related documentation.

Supported by a Number of Industry and Consumer Groups

It’s also worth noting that this legislation has been supported by a growing chorus of voices, ranging from industry groups to economic “think tanks.”

Michael Stegman, a senior fellow with the Housing Finance Program at the Milken Institute, said the bill would “broaden access to credit for self-employed, seasonal workers, and low- and moderate-income borrowers.”

Bill Killmer, an SVP with the Mortgage Bankers Association, said that the industry group strongly supports the legislation because it prevents the self-employed from facing “unnecessary obstacles to homeownership.”

Of course, there’s a process here. Bills such as this one typically have to be approved by both the House and Senate, and then be signed into law by the president. But the fact that the legislation has garnered wide-ranging support could work in its favor.

Have questions? Are you a self-employed worker in California? Do you need a mortgage loan to help finance the purchase of a home? Please contact us with any financing-related questions you have.

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