By Glenda Brass, MBA
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 friendlier toward "moonlighters." Moonlighters are individuals with self-employment income from a second, non-salaried business. They are no longer required to show proof of income if they're qualified based on the income from their "salaried" job.
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, as is the case with traditional salaried individuals. 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.
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. Fannie Mae is now working with a looser set of guidelines for the nation's self-employed borrowers.
The policy updates encompass three areas:
1.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.
2.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.
3.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.
It’s important to note, however, that these rules apply to conventional home loans only. Guidelines for FHA and VA loans may be different.
For self-employed borrowers, it's now easier to get mortgage-approved than during any period this decade. And, with mortgage rates still low, it's an excellent time to consider your options.