Fourteen percent (14%) of respondents surveyed by the Federal Reserve Board received income from self-employment in 2016. And nearly 15 million Americans are self-employed based on Pew’s research.
Up until now, it’s been widely known that there are great challenges faced by self-employed borrowers attempting to qualify for a mortgage because of stringent guidelines with respect to income. First and foremost, there is the required length of self-employment history to meet, which has almost always been at least two years.
Also, gathering proper documents for self-employment income is a challenge in itself. Unlike salaried workers who can prove their income through pay stubs and Form W-2s, self-employed applicants may have to gather personal and business tax returns, financial statements, contracts and more to show much they earn.
This landscape is changing at least for conventional loans eligible for Fannie Mae’s purchase. In August 2015, Fannie began loosening some of its standards with respect to the calculation and documentation of self-employment income.
And the latest Desktop Underwriter® Version 10.1 released on the weekend of July 29 is proof of major changes to how self-employment mortgages are made.
Fannie Mae has reduced the length of self-employment and paperwork required for most self-employed borrowers from two to only one year of tax returns, so the task is less burdensome and the eligibility more likely.
Indeed, the relaxed guidelines under DU® are expected to ease the way for more self-employed borrowers to tap conventional mortgages.
Are you self-employed? You can benefit from Fannie Mae’s big underwriting changes.
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Fannie Mae Updates Self-Employment Income Documentation
Fannie Mae now allows self-employed borrowers to present just one year of filed tax returns with the implementation of DU® Version 10.1.
In the past, Fannie Mae required self-employed borrowers to submit personal and business federal income tax returns for the most recent two years. This two-year requirement with respect to business returns can be waived in most instances.
Under the latest Desktop Underwriter®, most self-employed borrowers will now submit tax returns to verify their income for only the most recent year.
This also means that self-employed borrowers need not have to wait for two years to build their self-employment history for loan qualifying purposes. Under Fannie Mae’s new rules, they can be considered for a loan if they meet its other requirements.
With these changes, more self-employed borrowers can qualify for mortgages underwritten by DU.
How DU® Verifies a Self-Employed Borrower’s Income
Based on Fannie Mae’s Selling Guide published on August 29, 2017, lenders may verify income from self-employment through a borrower’s tax returns, individual and business, as applicable. They may also pull transcripts relating to those tax returns that were filed for the most recent two years.
Now, for loan casefiles allowed by DU to submit a year’s worth of tax returns, the lenders must document the income by:
- Obtaining the borrower’s signed individual and business federal income tax returns for the most recent year.
- Confirming that the individual’s tax returns reflect at least 12 months of self-employment income.
- Completing Fannie Mae’s Form 1084 Cash Flow Analysis, or any other analysis that conforms to the same principles.
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This cash flow analysis is an important aspect in evaluating self-employment income. What the lenders want to find out is whether the borrower has a steady income to rely on for his/her mortgage repayment.
Lastly, lenders are required to look into funds received by the borrower from his/her business income. It is of interest to lenders to check on the stability of the business so it can provide continuous income to support the borrower’s mortgage obligations.
If two years of individual tax returns are submitted, lenders may not require business tax returns from the borrower if it has been proven that:
- He/she is using his/her personal funds for the down payment, closing costs, and reserve requirements.
- He/she has been self-employed in the same line of business for at least five years.
- He/she has shown an increase in her self-employment income over the past two years, as reflected in his/her individual tax returns.
Self-employed borrowers make up a very large segment of all borrowers, and have faced some of the greatest challenges in the past when applying for mortgages. Now, with much less strict rules, self-employed Americans have a far better chance at getting the mortgage s they need because of Fannie Mae and DU® Version 10.1.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.