Self-Employment Mortgages Get Simpler
For the 14-million self-employed borrowers nationwide, it’s getting easier to get approved for a mortgage.
Recently, Fannie Mae issued new loan guidelines related to self-employment income.
Some of the highlights include a documentation reduction from two years of federal income tax returns to one, in certain cases; and, a new income calculation for business owners with little or no history of distributions.
The new loan guidelines are also more friendly toward “moonlighters”.
Borrowers with self-employment income from a second, non-salaried business are no longer required to show proof of income if they’re qualified based on the income from their “salaried” job.
Even better? Today’s mortgage rates remain firmly south of 4 percent. It’s an excellent time to shop for a mortgage.
Getting Approved For A Mortgage When You’re Self-Employed
When you’re buying a home or doing a refinance loan, there are specific steps to get approved for mortgage.
First, you apply for your loan, which you can do in-person, online, or by telephone.
The application will require information regarding your annual income, your savings, and your debts; as well as your employment history and a record of where you’ve lived.
Once completed, your application is given to a bank employee called an “underwriter”.
Your underwriter will review the information provided, making requests for clarifications, where needed; and, for documentation which can prove the information you’ve provided.
For example, if your bank accounts show an atypical, large deposit made within the last 60 days, your underwriter may ask for proof of the deposit’s source.
You may also be asked to provide other documentation, too, at the underwriter’s discretion.
The underwriter’s job is to make sure your loan meets the minimum qualification standards set forth by the bank.
This process of review is called “underwriting”.
It’s only after underwriting is complete that the loan can be issued a “Clear-to-Close”, which means that your application, indeed, meets the bank requirements. You’ll close on your home shortly thereafter.
However, the underwriting process varies from applicant-to-applicant and loan-to-loan. The documentation required by an underwriter is different for every mortgage borrower.
For self-employed borrowers — especially — documentation requirements can seem onerous.
In addition to the typical requests for bank statements and credit reports, self-employed borrowers are required to show federal income tax returns and additional documentation showing the vitality of their respective businesses.
Recently, though, self-employed borrowers have caught a break.
Lenders have recently reduced the amount of paperwork many self-employed borrowers are required to produce. And, for some with “second jobs”, the paperwork requirement is now waived altogether.
Mortgages For Self-Employed Borrowers
Since late-August 2015, Fannie Mae has been working with a looser set of guidelines for the nation’s self-employed borrowers.
The policy updates encompass three areas :
- Self-employed borrowers with no history of “taking paychecks” (i.e. business distributions are irregular or non-existent)
- Self-employed borrowers who don’t have two years of federal tax returns to support their business
- Salaried borrowers with a second, self-employment job for which the income is not required to qualify
For self-employed borrowers with a history of paying themselves, new mortgage guidelines state that the borrower must only have access to the business income; and, that the business shows adequate liquidity to support income withdrawals.
In general, to prove you have access to business income, a letter of incorporation or K-1 filing which states your ownership percentage will suffice.
For self-employed borrowers without two years of federal tax returns, guidelines have been loosened to allow one year of returns, provided that those returns show 12 months of self-employment income and that a cash flow analysis of the business appears sound.
However, it’s the third provision which may be most welcome to self-employed mortgage borrowers — especially those who don’t rely on their “side business” to support their home or household.
Under Fannie Mae’s new rules, borrowers qualifying for a mortgage using the income of their “salaried” job are no longer required to provide proof of income for their self-employment.
This provision applies to borrowers living off retirement income, social security income, pension payments, and/or dividends as well.
If your mortgage application shows sufficient household income sans self-employment dollars, the requirement to show federal income or corporate tax returns as it relates to self-employment can now be waived in underwriting.
Note that these rules apply to conventional home loans only. Guidelines for FHA and VA loans may be different.