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Great News For The Self Employed
Getting approved for a mortgage for the self-employed is becoming easier by the day. This is after the recent changes in Fannie Mae guidelines in regards to self-employment income. Topping the list of changes in the guidelines is the documentation of federal income tax that has been reduced from the current requirement of two years to one, although this applies to certain cases. Besides, the body has unveiled a new income calculation that caters for business owners with minimal or zero history of distributions.
Another category of people that will find these new guidelines more favorable include borrowers with a self-employment income from a second, non-salaried business. They’ll no longer be required to show proof of income from their self-employment sources if the income from “salaried” job qualifies them for a mortgage. Combined with the low mortgage rates that are currently standing at below 4%, it has never been a better time to shop for a mortgage.
So, What Has Changed With the New Rules?
This borrowing process has for a long time been quite tedious especially for the self-employed borrowers due to the burdensome documentation requirements. For example, on top of the usual requests for credit reports and bank statements, self-employment borrowers have conventionally been asked to show their federal income tax returns and other related documentation to determine the stability of their business.
However, with the new mortgage guidelines now in place, the amount of documentation is set to reduce. This move is expected to waive a fair share of the required paperwork especially for the self-employed as well as the salaried persons with secondary sources of income from non-salaried business.
Fannie Mae Guidelines for Self-Employed Mortgage Borrowers.
As mentioned earlier, the Fannie Mae guidelines are keen to make access to home loans easier for the self-employed mortgage borrowers. The policy updates that have been in effect since late-August 2015 covers three main areas;
Self-employed borrowers whose business distributions are irregular or non-existent
In this case, you (borrower) will only be required to have access to your business income which you can easily prove by producing a letter of incorporation or the K-1 filing. Additionally, your business should show adequate liquidity that can support income withdrawals.
Self-employed borrowers whose businesses do not have the previously required two years of federal tax returns.
The new rules offer looser guidelines for this category where all that is required is a proof of one year of federal tax returns. However, your business’s cash flow needs to appear realistic and credible and covering 12 months and over.
Salaried borrowers who also have a second self-employment job
Income from your self-employment job/business is now not required as proof to qualify for a mortgage. This will particularly be welcomed well if you’re a borrowers living off pension payments, retirement income, social security income as well as dividends. This means you no longer have to produce your federal income or corporate tax returns as it relates to your non-salaried source of income. This will, however, apply if your application for a mortgage indicates adequate household income less that which comes from your self-employment.
It is worth noting that these new rules only apply to conventional home loans, and thus guidelines for other mortgage products such as FHA loans and VA loans may differ.
Published by Debora Aguirre Realty Executives Advantage