Good Friday AM,

 

The jobs report out today and arguably stronger than expected. 1.7+mm new jobs on expectations for 1.6mm. The unemployment rate (cough) is at 10.2%  on expectations of 10.5. A deeper analysis of the report payroll numbers shows a few cracks. Jim Cramer on CNBC this a.m. shared his feelings on the report. “I don’t see anything here that makes me feel confident,” Cramer said “referencing the sectors that showed strong employment gains, such as eating and drinking establishments, which rose by 502,000, and retail, which added 258,000 jobs. “Drinking places are all being shut. That is just a huge part of the equation,” said Cramer. “They had the nonessential [retailers] come back. Well, how are those guys doing? Horribly. I suspect that we’ll see big layoffs there.”

 

Equities down on the report and commentary. Gold is down. Mortgage bonds getting a boost on the questionable report. Treasuries are diverging and taking a little hit with the 10-yr yield pushing to .57%. Keep in mind that .58% is a pivot point and if the 10-yr closes at .58 or higher, it is a sign to lock.

 

I have had a few questions on what are the new guidelines for self-employed borrowers to qualify for conventional loans (and now government loans) during Covid. Please see below and share with peers.

 

New Paperwork Demands for Self-Employed Workers 

 

Lenders are now required to get more recent paperwork upholding the income reported by self-employed borrowers. That’s understandable, given the near-overnight permanent closings of many small businesses under the weight of the pandemic. 

 

For instance, one of the changes is that lenders needed to confirm the borrower’s business would be open and operating within 20 days of the date on the loan. “Self-employment income is variable in nature and generally subject to changing market and economic conditions,” the Fannie Mae letter stated.

 

Fannie Mae said would-be borrowers shouldn’t be ineligible to get loans simply because they were self-employed. “However, the lender is required to determine if the borrower’s income is stable and has a reasonable expectation of continuance,” lenders were advised.

 

Self-employed borrowers also have to hand over:

 

• Audited profit-and-loss statements for the year to date, including the month before the date on the loan application; the closing date on the statement can’t be more than 60 days before the loan application date
• An unaudited year-to-date P&L statement signed by the borrower
• Two most recent business bank account statements

 

These are similar in broad outline to the requirements placed on self-employed borrowers before COVID-19, at least since the last housing crisis tightened standards for all borrowers. However, the requirements call for much more recent documentation. Borrowers, for example, previously often could get by with documents up to four months old. 

 

In addition, when evaluating self-employed borrower income claims, lenders must also assess whether:

 

• The business can support continued income
• The business will need to relocate in order to keep working during the pandemic
• Demand for the business’s products and services is likely to continue (lenders are told to check current receipts and purchase contracts) 
• State or local stay-at-home orders have affected operations and revenue 

 

Of course, some businesses have not been affected by COVID-19. Lenders can consider that possibility if a self-employed business owner explains in writing how the nature of the business means the pandemic’s impact will be negligible.

 

Using the profit-and-loss statements, lenders are expected to compare year-to-date business income with prior years. “If stability cannot be confirmed, the income is not eligible for qualifying purposes,” the lender letter said. If only part of the income from self-employment is deemed stable, only that portion can be used for qualifying.

 

Bottom Line:

 

The best advice to self-employed borrowers during the pandemic is to look over these new document requirements and discuss them with their lender. Bear in mind the new instructions for how recent the paperwork has to be. Prepare the necessary financial statements and gather bank statements, receipts, contracts and other documentation likely to be needed. Time the loan application so that all this is recent enough that it will clear the new, higher benchmarks.

 

Self-employed borrowers who have previously applied for mortgages will find their earning power is still viewed with skepticism. But now the scrutiny is closer, the analysis is more pointed and the freshness of the data is critical.

 

Please remain safe and stay healthy, enjoy the weekend and first, make today great!