A large portion of home loan seekers are self-employed, making the ability to get a mortgage slightly more difficult. As the economy turned and people started losing their jobs and becoming unable to find new jobs, self-employment was the only option.
Combining the change of employment status with the tightening of the mortgage guidelines made it nearly impossible for people that owned their own business to become homeowners. Luckily, the guidelines have since relaxed and people with self-employment income are better able to get a loan, even with Fannie Mae.
Self-Employment Documentation Requirements for Fannie Mae Loans
The hardest part of proving self-employment income is the documentation requirements. If you were employed by a company, you would typically only have to show your last 2 paystubs and the W-2s from the previous 2 years. Because you work for yourself, though, and your income can be easily “fudged” underwriters and Fannie Mae require more verification to prove your income is legitimate.
The Fannie Mae loan requirements may include any of the following:
- 2 years of tax returns showing the self-employment income and subsequent expenses
- 12 months’ worth of bank statements showing receipt of the self-employment income
- Proof of licensing to show your business is legitimate
- Letter from your CPA or financial advisor that helps you with your business income/taxes stating that you are in business for yourself and the length of time you have held that business
These documentation requirements are just the start of what underwriters require. Every situation will differ as will every lender’s requirements. Some lenders are more lenient than others, but some situations require more in-depth verification, especially if there are large deposits in your bank account that cannot be traced back to your business income.
Exceptions to the Rule
The good news is that 2016 brought about more relaxed guidelines for self-employed borrowers in certain situations. These situations are often fairly common, making it easy for more self-employed borrowers to qualify.
These Fannie Mae loan guidelines include:
- If you do not take a regular income from your business, you are not automatically disqualified. You simply must prove to the lender that you have access to the business account without any restrictions. You can prove this access with a K-1 or incorporation letter. As long as you have the access and the business accounts show the necessary liquidity to qualify you for the loan, it can count as your income.
- If you do not have two years’ worth of tax returns for your business, one year might be acceptable. In this case, however, the one year that you have must cover a full 12 months’ worth of self-employment and the cash flow must be sufficient.
- If your self-employment income is not your sole source of income and you do not need it to qualify for the Fannie Mae loan, meaning that your debt ratio is low enough without the self-employment income, you do not need to do anything to prove that income.
The Benefits of the New Self Employment Income Guidelines
Self-employment income used to be a large barrier to home ownership because underwriters would take a 2-year average of the income of the borrower. For someone just starting out in business, the 2-year average could hurt their chances because that first year is usually not very profitable. Even if the second year was profitable, taking an average of a profitable and not profitable year can be too low to qualify for a mortgage. With the new guidelines, however, a one-year snapshot might be sufficient, making it easier to qualify. Without that lower income to bring the average down, more potential borrowers are able to qualify for the loan.
Qualifying with the New Fannie Mae Loan Guidelines
As is the case with any type of mortgage, lenders can have overlays. This means that they put additional restrictions on top of the restrictions required by Fannie Mae. Because of this, it is important to shop around with different lenders. You might find that 2 out of 3 lenders require that you provide 2 years’ worth of tax returns, while the third lender only requires one year. If you have difficulty qualifying with two years’ of tax returns, you can go with the 3rd lender and get approved for the loan as a self-employed borrower.
The overall premise of determining self-employment income is ensuring that there is stability. This is best proven not only with tax returns but with bank statements showing receipt of the income. If you own a business by yourself, you can prove the income with business accounts as long as you do not use personal accounts as well to qualify as there could be what is called “double dipping” with the income. If you can prove the stability of the income and the business can be determined as financially strong and in an industry that has consistent demand, the associated income can be used. If there is a partnership, however, there could be some further issues in determining the income, especially if you use business accounts, since the entire amount of the money is not yours to use.
If you are self-employed, do not think you cannot qualify for a conventional loan with Fannie Mae. There are many loopholes that you can use to get approved and with today’s guidelines being looser than before, it is definitely easier. As long as you can provide stability and consistency of at least 12 months with your self-employment income, you have a good chance of getting approved. In the future, keep in mind what you plan to do and think of the expenses you write off on your taxes accordingly. If the write-offs will hurt your income enough that your debt ratio will be too high, it might not be worth writing them off for a year or two until you close on your mortgage. Once you close, you can always go back to writing those expenses off, but for the time being, you want your income to be as high as possible for qualifying purposes.