Fannie Mae: Introducing the 2023 Guidelines

Although you’ll go an extra mile to prove your income, the requirements are generally the same. Lenders will look at your regular income, credit standing, and unpaid mortgages.

Read on to understand the process of income verification for business borrowers. We’ll also look at the eligibility criteria for a mortgage when you have existing debts.

But First: Where’s the Cut?

When it comes to loan advancement to self-employed individuals, prospective lenders put emphasis on the level of risk. They want an assurance that you’ll pay back without difficulty or foreclosure.

If you worked for a government agency or private company, lenders would consult your employer to verify your income and its sustainability in the coming years. When you’re self-employed, lenders require extra documentation to verify your income. It is that simple.

Verification of Self-employment

When using income from a business to borrow a loan, the lender will verify your business existence within four months of your application. A verification process assures the lender that your business is actively operating.

Below are ways the lender may verify your business existence:

• Proof of current contracts you’re working on, as well as signed work invoices.

• Proof of current receipts for services rendered in the last 20 days of making an application.

• Previous approval from your lender that the company is up and running.

• An active business website that showcases your activities and operations.

Your Due Diligence As a Borrower

As a temporary eligibility requirement, the mortgage financier may review your credit report to determine the current state of any outstanding mortgages. In addition, the lender applies due diligence to ensure you are current on all loan obligations.

To qualify for a new loan, you should have paid all mortgages in the preceding month before applying for a new one.

Evidence of diligent mortgage payments include:

• A good payment history from your financier or third-party agent.
• A repayment statement if you refinanced a mortgage.
• Your most recent mortgage account statement.
• A mortgage validation.

What If You Have Payment Gaps?

Missing out on your loan repayment doesn’t necessarily hinder you from getting another loan. If you are not current on your mortgage, you may still be eligible through legally accepted resolutions.

Below are two standard resolution methods for loan eligibility:

Reinstatement

A mortgage reinstatement is effective if you pay all your balances after a default. Therefore, the lender restores your loan into a clean slate that allows you to continue making regular payments for the remaining duration.

You can qualify for a mortgage if you settle your mortgage debts through reinstatement. However, indicate in writing the source of funds you used for the loan reinstatement. As a requirement, you cannot use proceeds from a mortgage refinance for a mortgage reinstatement.

Loss Mitigation

Loss mitigation is a formal arrangement with your employer that cushions you against further costs on your loan. For instance, if you’re unable to pay your mortgage, the lender may modify mortgage terms to allow a revised payment plan.

You can qualify for a new mortgage if you settle your outstanding mortgages through loss mitigation. Before then, satisfy any of the obligations listed below:

• Make three consecutive payments on your debt.
• Make three consecutive payments before an effective date in case of deferral.
• Complete a three-month payment trial in case of modification of payment terms.

Requirements for Self-employed Borrowers

There are no additional restrictions that will make it more difficult for you to obtain a mortgage if you are self-employed. Nearly all requirements are similar for every applicant.

If you’re in business, the most important part is to document your income clearly for the lender’s scrutiny.

Income Analysis

Income from self-employment varies with changing economic patterns and market trends. For instance, a major pandemic can affect your customers’ buying patterns, hence lowering your profits.

But that does not hinder you from getting a loan if the lender believes your income is stable and sustainable for the future.

Lenders will use the following paperwork to ascertain your income:

• An audited income statement showing earnings, expenses, and net income. The audited statement should include financial records before your mortgage application date in the last month.

• An audited profit and loss statement that you duly signed shows the business financial records. It should also include three business accounts statements for the three last months.

How Lenders Assess Your Business Performance

Lenders will examine your depository accounts and income statements to assess the impact of external factors on your business. Aside from your financial records, a general guideline provides mortgage lenders with information about your business’s operations and stability.

Here’s a quick reference:

Assessing Your Business Operations

Lenders look for any efforts to modify your operations to increase income, such as changing your business location or altering your business plan. Additionally, they’ll look for a fluctuation in demand for the products you sell by examining your receipts.

Assessing Your Business Income

A business income assessment compares the current and previous income statements within a specific period, such as a month.

When analyzing the income statement, financiers can adjust your cash flow to reach an optimum income level. If the income statement you provided has no sufficient information as required, your lender may ask for additional information, including your monthly income trend.

Assessing Your Business Stability

A careful examination of your income and loss statement should depict how stable your business will be. Severe impacts of the pandemic may cause you to modify your operations to remain stable in the market.

Similarly, your tax returns and balance sheet may indicate financial liquidity, which is your financier’s primary concern.

Adjusting Your Qualifying Income

While calculating your qualifying income, lenders may identify gaps that create a deficit in the minimum requirement. Subsequently, they will request additional documents to support your qualifying income.

Two scenarios may come to play:

• Low Net Income - If your net income is lower than the usual or expected monthly income, the mortgage financier may reduce the amount of qualifying income required. The qualifying income, in this case, shouldn’t exceed the level of your stable income.

• High Net Income - Sometimes, the calculated qualifying income may surpass the expected or usual amount. The lender, in this case, should only use the income amount not exceeding your current stable income. In the end, it lowers your qualifying income level.

Get details on how to protect your business assets here.

Guidelines for Self-employed Mortgage Rates

The concept that self-employed lenders cannot get a mortgage is untrue. The truth is that buying property when self-employed isn’t that complicated.

You’ll enjoy the same mortgage programs and rates as other employed borrowers.

The only difference is that you’ll have to prove your income stability, including attaching a profit and loss statement.

As long as you’re ready, have sound financial health, and have credit standing, you can become a self-employed borrower. Learn more about this topic here.