According to a recent McKinsey’s American Opportunity Survey, 36% of employed Americans identify as self-employed, representing a significant increase from 27% in 2016. This number includes “side hustles,” but 72% of independent workers say they have only one job. Although this form of employment comes with benefits, such as greater flexibility and the ability to set rates and work schedules, it can be a significant hindrance when applying for a mortgage. Most underwriters focus on elements such as steady employment, regular income, and tax returns to determine a borrower’s eligibility for a mortgage. However, independent contractors often fall short in all those categories.
Over the past few years, Freddie Mac, Fannie Mae, and FHA have added an option that allows lenders to broaden their lending criteria to include on-time rent payments, increasing the chances of first-time homebuyers and those with a low or non-existent credit score of getting approved. Freddie Mac is now rolling in a new opportunity for Americans who may not be traditionally employed to improve their mortgage application.
Leveling the Playing Field
Beginning November 6, 2022, Freddie Mac is adding a new option to its automated underwriting system—Loan Product Advisor® (LPA)—to include a review of a borrower’s bank account data to identify a history of positive monthly cash flow activity. This option opens new possibilities for independent contractors who frequently write off business expenses to lower their tax burden. This results in a lower taxable income, which is what underwriters take into consideration when reviewing mortgage applications.
Thanks to this new option, called AIM (Asset and Income Modeler), lenders and brokers can include financial account data for LPA to identify 12 or more months of cash flow activity in the tool’s risk assessment, using data obtained from checking, savings, and investment accounts. Using AIM can only positively affect the borrower’s credit risk assessment.
“With the addition of positive monthly cash flow data, our underwriting system can help with more accurately predicting a borrower’s ability to pay their mortgage because it uses a comprehensive view of how personal finances are managed over time,” said Terri Merlino, Freddie Mac Single-Family senior vice president, and chief credit officer. “Our latest innovation levels the playing field and helps make homes more accessible to borrowers whose lenders might not have qualified them with traditional underwriting methods. This should particularly help first-time homebuyers and underserved communities.”
Call or drop us an email, if you’d like more information about this new program.
