Requirements for Self-Employed Borrowers
In response to the economic instability brought on by COVID19, Fannie, Freddie, FHA and our Jumbo investors are requiring additional documentation for Self-Employed Borrowers to show up-to-date profitability and support stability of income of their companies.
“Income from a business that has been negatively impacted by changing conditions is not necessarily ineligible for use in qualifying the borrower,” said Fannie Mae’s recent lender letter. “However, the lender is required to determine if the borrower’s income is stable and has a reasonable expectation of continuance.”
Business owners are encouraged to review the information below and download our Self-Employed Borrower Documentation Checklist and fill out our Self-Employed Borrower Questionnaire for a smoother and more predictable loan process. Contact your Guaranteed Rate loan officer with any specific questions or concerns.
What types of companies and/or income will be affected?Examples of income types if borrower owns 25% or more:
- Schedule C
- S-Corporations & Partnership
- C Corporations
Standard Self-Employed Borrower Documentation Requirements:
- 2 most recent years personal 1040s (if on extension, please provide extension AND 2 prior years)
- 2 most recent years 1065, 1120, or 1120S Business Tax returns (Sole Proprietor, Partnerships, C-Corporations, and S-Corporations)
- YTD Profit & Loss and Balance sheet required if more than a calendar quarter has elapsed since due date of most recent calendar or fiscal year-end tax return on FHA (Balance sheet is not required for Sch C income) for FHA loans only
- 2019 year-end P&L and bank statements are required if tax returns are on extension for Jumbo loans only
NEW Additional Documentation Now Required for Fannie, Freddie, and Jumbo:
- A Year-to Date Audited P&L as of the most recent month preceding application*
- Self-Prepared, or Unaudited Year-to-date P&L as of the most recent month preceding application AND 3 months most recent bank statements that coincides with the last 3 months on the P&L*
NEW Additional Documentation Requirements for FHA Loans:Effective for case numbers assigned on or after 8/12/20-11/30/20, Mortgagee must verify the existence of the borrower’s business within 10 calendar days prior to the date of the Note to confirm that the Borrower’s business is open and operating. The Mortgagee must obtain one of the following to verify and confirm that the business is open and operating:
- Evidence of current work (executed contracts or signed invoices that indicate the business is operating on the day the lender verifies self-employment)
- Evidence of current business receipts within 10 days of the note date (payment for services performed)
- Lender certification that the business is open and operating (lender confirmed through a phone call or other means) or
- Business website demonstrating activity supporting current business operations (timely appointments for estimates or service can be scheduled).
NEW Additional Documentation Requirements for Jumbo Loans:Same as above, except each quarter should be separated on the Profit and Loss Statement NOTE: Additional documentation may be required based on the loan program and nature of the business
If You Use Personal Bank Statement Only:
- Documentation to support Business income deposits
Important Technical Requirements (all self-employed borrowers):
- P&L must be no older than 60 days old as of the Note Date
- P&L should state time covered clearly: 1/1/2020-11/30/2020, or 1/1/2020-3/31/2020 & 4/1/2020-6/30/2020 & 7/1/2020 – 9/30 & 10/1/2020 – 11/30/2020
- Bank statements must be formal copies. We are not allowed to use our automated asset verification technology for self-employed business analysis.
Frequently Asked Question:Q: I received a Paycheck Protection Program (“PPP”) loan. Does that mean I am unable to qualify for a new mortgage?
A: It is important that you notify your loan officer and mortgage team if you have received a PPP loan. This does not count as income and will be subtracted for qualifying. Additionally, it’s important to note that you cannot use PPP funds towards a loan.
Additional Resources:Check out Fannie Mae’s letter on this topic and HousingWire’s commentary here.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. its affiliates and subsidiaries disclaim all warranties and do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.