Employee vs Self Employed

Employers have really struggled to keep things going these past five years.  I have seen a growing trend where those looking for jobs can only find one where the company hires you as an independent contractor – not an employee.  For many, a job is a job – but there are major differences you should be aware off, especially when it comes to qualifying for a mortgage.

 

James and his wife Patty looked last year to buy a home on the Big Island.  James had been with his employer for over a decade and worked remotely.  The Big Island was to be the couple’s new home.  Right in the middle of their home search, James lost his job due to corporate belt tightening.  It took James several months to find a new job that also offered remote work.  He called me very excited because he could now restart that home search and move to Hawaii.  It was tough to break the news to James that his new employer hired him not as an employee, but as an independent contractor.  James was now self-employed.

 

In mortgage lending, those self-employed are reviewed much closer than employees.  Employees get paid a certain wage for a determined amount of work, and that’s that.  But those self-employed may have variable income versus regular income – such as being paid by the project or task.  Self-employed may have expenses that will impact their net income.  Maybe it’s travel, or the need to rent an office.  Since there are expenses for the self-employed that employees don’t encounter, lenders need to see a track record of income and expenses to get a true determination of the self-employed’s net income.

 

There are exceptions to the rules, but generally, self-employed borrowers must provide two-years of federal tax returns showing the income and expenses.  If you worked previously as an employee and are now self-employed doing the exact same job, the borrower needs just one-year of self-employment.

 

James and Patty will have to wait a year, or James will need to find a job as an employee in order to make their Hawaii dream a reality now.

 

It is important to understand how you are paid and the implications of that when applying for a mortgage.  If you have questions on this topic, let me know, or ask a competent mortgage professional to review your specific situation.

 

 

 

 

AI Can Be Helpful

I would like to share two examples of where I found AI to be really helpful.  Both are similar, in that I wasn’t aware that the AI bots that are available to us can easily crunch data from documents we have.  I always thought these chatbots were for us to pose a question and they would do the research based on what they find on the internet.  This is how I used Google search for years.

 

A friend of mine had a fight with cancer a few years ago.  Since then, he has been very careful of what he eats, how he sleeps, and gets plenty of exercise.  He is cancer free but is concerned that it may come back of he’ll suffer from something else.  He has a box full of medical records and test results.

 

This was the amazing part.  He took every stitch of records, doctors notes, and test results, and put all that data into a medical AI chatbot.

 

One thing computers have over us humans is the ability to review large amounts of data and analyze it for inconsistencies, errors, anomalies, and connections.  He believes the medical AI chatbot he uses has a better chance of detecting issues over that of his human specialists.  He’s not replacing his doctors with ChatGPT, but he is bringing to the doctor’s attention data the AI bot has uncovered.  He can now talk to his doctors about tests he should take or go over something the AI bot found that his doctors had not.

 

 

The second story is something I was able to do this past week that shocked me.  As part of our annual license review, the Feds want us to complete this very specific financial form.  It’s 6 pages, and despite being pretty good at understanding accounting, I always had to pay my company’s CPA to complete the form.  My CPA retired last year and I’m now working with a new guy.  He had never seen the form before but said he would be happy to complete it for me.

 

I then got the idea from my friend’s medical bot.  If the bot could review medical records, how hard would it be to complete a financial disclosure form?

 

I uploaded the form that was completed last year, along with the relative company data, along with the data to complete this year’s form.  All the documents were Adobe PDF files.  I asked ChatGPT if it could review the data and disclosure form completed last year and provide me the necessary information to complete this year’s form.

 

It did it.  And it did it in about 10 seconds.

 

That saved me time and money.  I know the information is accurate because the government website where I have to plug all the numbers into let’s me know if something doesn’t add up accurately.

 

 

I just wanted to share this with you because it seems that not all AI if terrible.  AI is now used by astronomers to study vast images in space because the AI can detect the slightest movement of a celestial object from one image to another.  That same technology is now used by radiologists to detect the slight change in cell shape and size in mammograms – comparing previous tests current ones.

 

I’m beginning to find a new fondness for AI…

 

 

 

 

And now the week’s economic news…….

 

Tariffs Struck Down – Sort Of…

While the major economic data released this week caused little reaction, a ruling against tariffs by the Supreme Court was negative for mortgage markets.  As a result, rates ended the week slightly higher.

 

On Friday, the Supreme Court struck down a specific statute President Trump used to impose tariffs last year. The International Emergency Economic Procedures Act (IEEPA) is just one of the tools Congress provides the President to deal with foreign trade.  The President head a press conference and announced an immediate 10% tariff to replace what the Supreme Court struck down.  Early Saturday Trump announce the tariff was being bumped to 15%.  It will take some time for investors to determine if the ruling, plus the new tariffs imposed, will be detrimental or beneficial to our national debt.  If the new tariffs are less than were previously collected, this could increase the budget deficit, causing the government to issue more bonds.  An increase in supply would require yields to rise to persuade investors to purchase additional bonds.

 

The Fed’s favorite inflation gauge, PCE, was finally released for December, and it was hotter than market estimates.  The Headline and Core readings both rose 0.4%, one tenth hotter than estimates.  Year-over-year, headline inflation rose from 2.8% to 2.9% and Core rose from 2.8% to 3% - both one tenth hotter than market expectations.  Looking deeper into the report, one tenth of the rise was due to video streaming services, like Netflix, Disney+, etc., which rose 19.5% in December and contributed roughly 0.1% to the monthly reading.  Did your streaming services hike their rates in December?

 

Shelter always plays an important role and rose by 0.3% in December and 3.3% year over year.  The yearly reading is still overstating inflation by about 0.4%.  Expectations are for this figure to fall and help inflation this year, but it’s been a slow move.  Tariff inflation is also expected to subside this year as well.

 

The first Q4 GDP reading was released, showing 1.4% annual growth in the quarter.  This was much weaker than the 2.8% expected, but the government shutdown played a big role.  Federal government spending dragged down GDP by 1.15%, again due to the shutdown.  Without it, the reading would have been closer to estimates, but still a little beneath it.  Real final sales to private domestic purchases, which is a good read on spending, rose by 2.4%, which is pretty good.  Looking at full year 2025, GDP is now on pace for 2.25%, but there are two more revisions to Q4 GDP.

 

Also delayed by the government shutdown, the latest home building data exceeded expectations. In December, overall housing starts rose 6% from November to the highest level in five months.   Single-family housing starts climbed to the best level since February. Building permits, a leading indicator of future construction, increased to the highest level since March.  Less encouraging, a separate survey of home builder sentiment on housing market conditions from the NAHB unexpectedly fell and has remained in negative territory below 50 for twenty-two straight months.  According to the NAHB, 65% of builders used sales incentives in February and 36% cut prices.

 

 

 

 

Next Week

Looking ahead, investors will continue to monitor comments from government officials about tariffs and from Fed officials for hints about future monetary policy. It will be a light week for economic reports. Consumer Confidence will be released on Tuesday. The Producer Price Index (PPI), a monthly inflation indicator, is scheduled for Friday.

 

Until next week….

 

*** Please note that Freddie Mac publishes their weekly rate report on Wednesday mornings from data received Monday and Tuesday. 

The graph above is intended to shown rate trends, and not “today’s current rate”. ***

 

 

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Do you think all lenders are the same?

There is a difference when you use Hawaii Mortgage Company for your financing.  Here’s a short video telling you why:

 

https://youtu.be/c7AKQ5wa2_U

 

 

 

Broker vs. Banker?

Click the link below to get a quick lesson on why working with a Mortgage Broker will benefit you on your next transaction.

 

https://youtu.be/iH3igW5v2jE