There is an important change that is taking place in the conventional mortgage guideline environment regarding self-employment and the income calculations that are now required. New Self Employed Borrower Calculations require us to go much further than we’ve previously done… my point being it’s not getting any easier for those who are self-employed in NC to obtain a mortgage loan.
We expect these changes to take effect before the end of March, and will be more substantial to those applying for a Conventional Loan.
In the past any positive income being shown on a business’s federal tax return that was passed to the borrower thru a k-1 statement could be considered for qualifying income (minus any applicable business expenses). Now there is an extra layer that will require these borrowers with the same type of business “income” to also prove receipt of actual cash distributions from the business.
In layman’s terms this is effectively doing away with only looking at “on paper” business profits and in turn is now requiring that the borrower prove that actual cash is being disbursed to them and can help pay their personal obligations.
WHAT TO LOOK FOR: K-1 that is reflecting Distributions (usually box 19) similar to Ordinary Business Income (box 1). If not, then this is a red flag file that you would want to run by an experienced LO. In our office, we can take files directly to an Underwriter for review, and normally have an answer for you within 48 hours.
It is actually easier to define which scenarios this new policy will not apply to so that you can be best prepared.
This change in Underwriting a mortgage will not apply to:
Schedule C or Sole proprietors
Individuals with less than 25% of business ownership on their k-1
Individuals with 100% of ownership on their k-1
Individuals that do not need business income to qualify for their loan.
Below is a summary of the written change taking place.
Guidance for documenting access to income and business liquidity
- If the Schedule K-1 reflects a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify, then no further documentation of access to income or adequate business liquidity to support the withdrawal of earnings is required in order to include that income in the borrower’s cash flo
- If the Schedule K-1 does not reflect a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify, then the lender must confirm the following to include the income in the borrower’s cash flow:
the borrower can document access to the income (for example, via a partnership agreement or corporate resolution), and
the business has adequate liquidity to support the withdrawal of earnings.
If you are a self-employed borrower interested in buying a home, please call us before you do your taxes. That way, we can go over all of your options Often times the income you need for a mortgage is quite different from the income your Tax Accountant recommends you claim. Self Employed Borrower Calculations will allow us to add back in any one time expenses, and depreciation (for instance)… but in general, it makes sense that we must show enough income to qualify you for the loan 🙂
ON THE OTHER HAND… If you are applying for a USDA Home Loan that has Income Limits – it might be helpful to know what those limits are.
If you have questions about Self Employed Borrower Calculations please call Steve and Eleanor Thorne 919 649 5058. If you are a first time home buyer you might qualify for a Mortgage grant.