Self-Employed Borrowers in a COVID-19 World

Getting a mortgage while being self employed can be challenging. Add a global pandemic into the equation and you can see where it can become even more fun (a healthy dose of sarchasm never hurts).

When it comes to qualifying for a mortgage, lenders will look closely at your ability to repay the loan in addition to credit, collateral and overall debt utilization.

Your ability to repay the loan is centered on your income sources. Lenders will want to verify your income is stable, consistent and likely to continue. For clients who are self employed, this has traditionally been verified by getting copies of tax returns to support historical income which is used to qualify.

Depending on the age of the business, lenders will typically ask for the most recent one or two years of complete federal tax returns. Lenders will review those tax returns to determine your qualifying income. This is traditionally where the income verification would stop.

In May 2020, the two biggest sources of home mortgage funds (Fannie Mae and Freddie Mac) issued additional guidelines for self-employed borrowers due to the COVID-19 pandemic. In addition to reviewing your tax returns, lenders were now required to review a year to date financial statement and additional supporting documents (such as balance sheets, bank statements, contracts and/or other documentation) that would support your ability to derive sufficient income to repay the mortgage going forward. Historically lenders have never required this documentation.

In early November 2020, Fannie Mae and Freddie Mac issued additional guidance to lenders and clarified previously issued guidelines. This guidance put a heavier burden on lenders to substantiate that a business remains open and capable of providing stable and consistent income in an amount sufficient to service the proposed mortgage.

In the end, it all comes down to documentation. You will be required to provide documentation that you would not have historically been required to provide. Lenders will ask for documentation that will help them to substantiate your loan is stable, consistent and on-going in an amount to service your debt. Some clients will not like the requirement for additional documentation and may feel like they are being hassled.

Loans to self-employed borrowers are sure to face a higher likelihood of being audited by Fannie Mae and Freddie Mac. Should a lender not document income in a manner they deem appropriate, the lender may be forced to buy your loan back. This means that these loans pose a higher risk to lenders and your cooperation is essential to a successful mortgage process. Failure to comply with providing requested documentation will likely result in your loan being declined or you being offered an alternative loan product at less favorable terms.

What you can expect to be asked for:

• Complete copies of the last two years federal tax returns (both business and personal tax returns), all pages and all schedules.
• Year to date profit and loss statement. This statement should reflect income received year to date, expenses and net profit.
• Most recent 3 months complete bank statements for the business. These statements should support your year to date profit and loss statement. If they do not, be prepared to explain why.
• Other documentation that will substantiate your income is stable, consistent and on-going.

These loans require more time and documentation. If you are in the market for a home loan and are self employed, I cannot stress to you the importance of starting this process earlier and working with an experienced self employed lender such as myself. I also cannot stress to you the importance of your cooperation.

I have been lending since 1991 and have a background in commercial lending and lending to clients with more sophisticated financial positions. If you want to know more about how I can help you, please contact our team.