Blog
Tuesday, March 25th, 2014 at 10:24pm
Self-Employed Borrowers
Listing agents may be wary of accepting contracts from self-employed borrowers for a few reasons, so I thought I’d share these challenges and how we overcome them.
- Problem: Many loan officers simply don’t know how to calculate self-employed income
- The number one reason why self-employed borrowers get a bad reputation for approvability is that many loan officers do not review tax returns ahead of time and calculate income correctly. They simply do not know what lines to add, subtract, and can’t calculate the income correctly. Tax returns can be complicated, particularly when there are both business and personal tax returns, and multiple investment properties.
- Solution: By properly documenting income during the pre-approval, and using Fannie Mae’s or Freddie Mac’s worksheet for calculating income, I can know the borrower’s income before they make an offer.
- For a self-employed borrower, we calculate income with two years of tax returns and a year-to-date profit and loss statement.
- Solution: By properly documenting income during the pre-approval, and using Fannie Mae’s or Freddie Mac’s worksheet for calculating income, I can know the borrower’s income before they make an offer.
- The number one reason why self-employed borrowers get a bad reputation for approvability is that many loan officers do not review tax returns ahead of time and calculate income correctly. They simply do not know what lines to add, subtract, and can’t calculate the income correctly. Tax returns can be complicated, particularly when there are both business and personal tax returns, and multiple investment properties.
- Problem: Being self-employed requires history of self-employment.
- The standard for how long a borrower needs to be self-employed is 2 years history AND 2 years filed tax returns. In some circumstances, particularly when a borrower has a history of working in the same industry OR doing similar work, 12 months+ of filed tax returns AND 1-2 years of being self-employed may be sufficient.
- Solution: We’ll figure out with the pre-qualification or pre-approval whether a borrower has sufficient history of operating their business to qualify. If a borrower has insufficient history, the solution may be waiting.
- The standard for how long a borrower needs to be self-employed is 2 years history AND 2 years filed tax returns. In some circumstances, particularly when a borrower has a history of working in the same industry OR doing similar work, 12 months+ of filed tax returns AND 1-2 years of being self-employed may be sufficient.
- Problem: Declining Income
- If a borrower’s income declines from one year to the next, an underwriter sees uncertainty in the future stability of this income. Particularly with self-employed borrowers, when there is a downward trend, an underwriter may choose to not consider declining income for qualifying income at all.
- Solution: I look at all possible opportunities to get around the declining income problem. We do this in many ways, for instance:
- Some loan programs allow a waiver to only review one year’s worth of tax returns [this solution is more likely to be possible if the business has been operating 5+ years]
- If income declined because two years ago there was an exceptionally good year, then we may use multiple years of tax returns to show that the decline in income is not a trend, but rather the past year’s income is normal and stable.
- If the current year’s income has increased or is on pace to match income from two years ago, with documentation the underwriter can understand although the income declined previously, it is once again on the rise.
- If income has declined but we can prove it’s stabilized, that can be a possible solution as well. We would likely need supporting documentation to prove this.
- Solution: I look at all possible opportunities to get around the declining income problem. We do this in many ways, for instance:
- If a borrower’s income declines from one year to the next, an underwriter sees uncertainty in the future stability of this income. Particularly with self-employed borrowers, when there is a downward trend, an underwriter may choose to not consider declining income for qualifying income at all.