Hello everyone! In the ever changing COVID-Mortgage world we live in now, there is an important guideline update for Fannie Mae and Freddie Mac that becomes effective with ALL loan applications starting June 11th, 2020. End date is TBD.
If you are self-employed or if you are a Realtor that is working with a self-employed borrower, you are going to want to PAY ATTENTION to this announcement.
Your mortgage lender must determine that the income from self-employment is stable and has a reasonable expectation of continuance. With COVID, there were many businesses that were either closed (temporarily) or greatly impacted financially. FNMA and FHHLC have come out with guidance on how all lenders must treat self-employment income. It isn’t pretty.
Due to the pandemic’s continuing impact on businesses throughout the country, lenders are now required to obtain the following additional documentation to support the decision that the self-employment income meets requirements:
- an audited year-to-date profit and loss statement reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application date;
Jen commentary: This is VERY expensive to do and will not be very common unless someone just happens to have one done for a different reason. Audited P&L’s cost THOUSANDS of dollars.
- an unaudited year-to-date profit and loss statement signed by the borrower reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application date, and two business depository account(s) statements no older than the latest two months represented on the year-to-date profit and loss statement.
Jen commentary: The business bank statements have to coincide with the P&L and if there are any PPP loans or any other gov’t assistance in there, they will have to be subtracted out and not used as income. If the income from the P&L is LOWER than previous tax returns, then the borrower will have to qualify on the LOWER amount. (Yeah…meaning the lovely pandemic income gets used to qualify versus what they WERE making prior to COVID. This is going to throw a LOT of people out of the “approval ring” as their bank statements and current P&L will be scrutinized.
Q: So, what does this mean for and are applying for a loan and you are self-employed ?
A: Have your P&L prepared ahead of time and send it to your lender along with your bank statements. If the income is very low, you may have to wait a few more months before you are eligible for a home loan. Once received, you lender will review and let you know if you are Ok to move forward.
Q: If you are a Realtor, what do you expect?
A: The Pre-Quals are going to take a little longer to do. Please be patient. Make sure you are working with a lender who actually knows this new guideline and takes the time to analyze the information correctly so that there are no surprises at the end. Worst case scenario is that the self-employed borrower will have to wait until business stabilizes to qualify.
Right now, it is unknown how long this temporary guideline will last. As I have preached before, now – more than ever- it is important to work with a lender who knows his/her guidelines and is up to date with all of the current and ever-changing regulations.
I am definitely not saying that it is going to be impossible for a self-employed person to get approved. It is just going to be a little more complicated.
We will get through all of this together!