Self-employment has advantages, especially the withdrawal of the home office and the elimination of commuting time. However, getting a mortgage is not one of them. Here are some tips that will address the newly stiffened licensing requirements.
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For millions of Americans today, trading a nine-for-five paycheck for a home office deduction and owning a business is the definition of the American dream. The largest percentage of American adults in 60 years one of eight are self-employed, including most real estate agents.
According to the IRSSelf-employed if you are a sole proprietorship, independent contractor, or otherwise self-employed (including part-time business). If you are a member of a partnership or own 25 percent or more of a business unit, you are self-employed.
Self-employment has advantages, especially the deduction of the home office and the elimination of commuting times and costs. However, buying or refinancing a mortgage is not one of them. For traditionally employed workers, lenders require copies of recent wage and tax returns (W-2) and an employment review from an employer.
Discretion and doubt
In order to verify the employment of self-employed persons, lenders usually need at least two years of permanent self-employment, which is verified by tax returns and bank statements.
As a result of the layoffs, vacation days and general economic uncertainties caused by the pandemic Fannie Mae and Freddie Mac have tightened the requirements for self-employed borrowers. Now self-employed borrowers need to provide:
- An unaudited profit and loss account since the beginning of the year including the last month.
- Bank statements for commercial banks showing the last two months of the income statement.
- Bank statements for personal assets if you do not have a separate business account.
- An audited profit and loss account since the beginning of the year, in which the business revenues including the last month are shown.
- Two years of tax return.
- At least two years of your company’s profit and loss account.
- Commercial bank statements for the last three months for the profit and loss account. (In December, Fannie Mae increased the statement requirements from two to three months.)
Even borrowers who jump through these new hoops may not get approved. Most lenders will play it safe and turn down an application when in doubt about a borrower’s ability to repay.
“Lenders have a clear reminder that in the old days they were scrutinized and had to buy back what lenders considered responsibly written mortgages. Additionally, the extra time, subscription costs, and fear of loan files are motivating many lenders to raise the bar for self-employed borrowers. ” Jeff Lazerson wrote in an article on the Orange County Register published on December 3, 2020.
5 tips dealing with the new rules
1. Take the time to improve your credit score and pay off debts
Results don’t improve overnight. You may need six to 12 months to receive Your credit in the best Shape you can. Do whatever you can to pay off your debts. Pay off credit cards, pay bills on time, and live in cash.
Perhaps the most important metric for a lender is your debt to income ratio.
2. Find a lender who has experience with self-employed borrowers
You can waste valuable months working with a lender whose insurers are unfamiliar and are not interested in working with self-employed borrowers. Many lenders raise the bar for self-employed borrowers given the additional time, underwriting costs, and hassle.
Some lenders charge self-employment loan fees in the form of points. Others may charge FICOs up to 780 or may not take out your mortgage unless you are already a customer.
Do some legwork and find someone who welcomes self-employed borrowers and has experience. Ask about the drawing process and guidelines. Find out what documentation they need from you and make a list.
3. Compile your documentation
You need more records than a nine-to-five worker to show that you are making enough money Make mortgage payments.
Remember, you are applying in the middle of a pandemic, when millions of people are unemployed and millions of small businesses are in trouble. You have to go the extra mile to convincingly document your income with bank statements, income statements and tax documents.
Self-employed borrowers typically spend as much business expenses as allowed on tax returns to reduce taxable income. Lenders may wonder if you can afford a mortgage. Include detailed information on your tax returns Profit and Loss Account to show what you’ve really done
Provide forecasts for the current year. Show a track record of successful self-employment. Provide accurate and compelling income statements. Show the progress and how you overcame adversity during the pandemic.
Large cash reserves may help reassure some lenders by showing that you are able to weather downturns in your business cycle without missing out on mortgage payments.
Consider attaching a list of debts and monthly payments, a list of all assets (savings accounts, investment accounts, etc.), additional sources of income such as alimony and social security, and proof of your business or employment (business license, letters from) your client’s explanation Accountant).
4. Check the documentation with your accountant before applying
Your accountant can check that your documentation is correct and thorough and may suggest improvements.
5. When all else fails, consider alternative loans
There are still “no-doc” loans that require little or no income records, but they are not the loans that caused the bubble 20 years ago. Their mortgage rates are up to 3 percentage points higher than traditional loans, and they require higher credit scores and down payment requirements. The minimum credit requirement is around 700. A down payment of 30 percent of the home value may also be required.
FHA, VA, Down Payment Support Programs, and GSEs offer alternatives to traditional mortgages. Some are only available to first-time buyers, but all come with government guarantees that reduce lenders’ risk and are well worth checking out.
As the pandemic subsides in the future, it’s worth checking to see if Fannie and Freddie have eased their requirements on self-employed borrowers.
Steve Cook edited The down payment report for down payment resources and writes for leading real estate blogs and news agencies. He was vice president of public relations for the National Association of Realtors, broadcast news correspondent, congressional press secretary, and executive at an international public relations firm.