Self-Employment Mortgages Rules
For the 14-million self-employed borrowers nationwide, it’s getting easier to secure approvals for a mortgage loan.
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.
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. 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. 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 required paperwork for self-employed borrowers. For some with “second jobs”, the paperwork requirement is now waived altogether.
Mortgages For Self-Employed Borrowers
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. The third provision 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.