Self Employment Guidelines For A Mortgage 2020

Self Employment these days can be scary – depending on what you do.  We are talking to folks who are in an essential business (maybe a physicians practice) and they are looking for a different home, based on their new quarantine needs.  The borrowers we spoke with today own a fairly large cleaning service, and they clean essential spaces.  It seems like a dangerous business – but I empathize with their desire to have quarters where they can stay away from the rest of the family if one of the parents become sick.  If you are in this situation please know that Self Employment Guidelines for a Mortgage in 2020 are a little different.

If you are living off of income received from Assets – please go to the bottom of the page for very important information.

By that, I mean we are asking for even more documentation than we have in the past.  We will still need tax returns for the past 2 years, and we will need information about what the business is currently bringing in.  These are the actual guidelines that came out this weekend:

“The Bank must verify the existence of the Borrower’s business no more than 120 days prior to the Note Date. Due to the impact the COVID-19 pandemic and the various social distancing measures implemented by different jurisdictions are having on many businesses across the country, Banks must now take additional steps to confirm that the Borrower’s business is open and operating within 10 Business Days prior to the Note Date.”

Self Employment Guidelines for a Mortgage in 2020

Here are some examples of how we will need to verify the business is still operating within 10 days of closing:

• Evidence of current work (e.g., executed contracts or signed invoices that indicate the business is operating on the day the Bank verifies self-employment)
• Evidence of current business receipts within 10 Business Days of the Note Date (e.g., payment for services performed)
• We must do a certification that the business is open and operating (e.g., we must confirm this through a phone call or other means)
• Business website demonstrating activity supporting current business operations (e.g., timely appointments for estimates or service can be scheduled)

If you are receiving checks on a regular basis (like this couple does) we asked them to begin making copies of the checks they received to show the accounts they are getting paid from.  If you are a self employed borrower who is still able to operate – document everything.  If you make lease payments, if you get PPP loans from the Government – keeps copies of everything going in and out of your business account.

If you are a self employed borrower who is UNABLE to operate – document everything.  Once your business is able to return to normal (just writing that makes me smile!!) we believe that business will come back strong.  Once that happens, you might want to buy a house in the next couple of years.  We will NEED the documentation that shows you made sound decisions during this period.

***  Note to All ***  There is no such thing as a “Mortgage Holiday.”  If you are in Forbearance on your mortgage – you will eventually be required to make your payments.  Please talk to us before you take this as an option.  You will likely hurt your credit long term.  You will not be able to buy another home until you’ve made 12 months of payments on time, it’s NOT a Holiday…  stepping off the soap box now.

Being Self Employed in 2020 means you are either making money – or borrowing money to stay afloat. If you are in the making money category – my suggestion is that you do the following in order to buy a new home in NC.

• Get your credit checked.  As an owner of a business, you already know how important it is to maintain a GREAT (not good) credit score.  If you are interested in owning new (or more) real estate talk to your lender.  If you have a 660 credit score – there might be a way for us to help you pay down the RIGHT credit cards, or add the right kind of credit, to maximize your good score into a GREAT score.  This process could take 60 days – so talk to your lender EARLY in the process.
• Save up!  If you write off most of your income (like your accountant wants you to) then you might need a “stated income” loan (also referred to as a SIVA or SISA).  You might need this kind of loan – not because you need a “liar” or “cheater” loan – but because you’re a smart business person who is taking every advantage Uncle Sam gives you to reduce the taxes you pay.  Before the Virus started, we had Stated loans that required AT LEAST 25% down and GREAT credit scores. These loans are referred to as NON QM Mortgages, and they have currently been put on hold – across the board.
• Show your Income on Tax Returns.  If you are that person (we just mentioned) who has a large number of write offs, it’s going to be all but impossible to get a mortgage from a traditional mortgage lender like us.  You will likely be going to the Private Equity department at your Bank.  What I’m talking about here is someone with Gross Sales Receipts (we just saw this person last week) of an eye testing company used by institutional systems across a large area, totaling $750,000 in sales.  The bottom line income amounted to $58,000 in direct income to the owner.  You don’t qualify for nearly as much on $58,000 as you would on (let’s say) $250,000.

Underwriting and Self Employment Guidelines for a Mortgage in 2020

Many of the large banks recently went to a minimum of 700 credit score for a mortgage – across the board.  Not just for those who are self-employed, but for all mortgage loans.  We can still make mortgage loans under that number.

What if you pay yourself W2 income?  Does that help? If you are Self Employed and the Company pays you W2 income that’s great – we still need to see the Tax returns showing that the business profited enough money to cover your W2 income.

We do not know what the effect of declining income will be for those in this situation (which I have to think is going to be more than a handful of businesses).  Currently, we are looking at averaging the last 2 years of income along with year to date.

In the last case we submitted – the FNMA findings (meaning the computer program that does some AI on the file) asked us to use 2019 income and year to date and average that over a 24 month period.  So it’s not giving full income values.  That’s a very conservative way to calculate it.  My guess is that the most conservative way to calculate income will be the one that is used.

Assets and Self Employment Guidelines for a Mortgage in 2020

These are straight from the new Guidelines – and it’s nothing short of amazing to me.  This has to be a short term situation:

Due to the continuing market volatility of certain asset types, we are implementing the following temporary requirements applicable to accounts with stocks, stock options and mutual funds:

• Evidence of liquidation, including Borrower receipt of funds, is required when using any funds from these accounts for Down Payment and/or Closing Cost
• The Seller must use no more than 70% of the balance in the accounts in order to meet the reserves requirements in Guide Section 5501.2 
• Market based assets are no longer considered for any value – this includes stocks, mutual funds, retirements funds

When this says the “Seller” must use, it’s referring to the Bank.  Your mortgage gets sold.  We don’t have any firm guidance on how to qualify someone who is getting distributions from Stock or is liquidating accounts at $12,000 a month.  I’ve done many loans for folks in this situation – they worked hard and saved all of their life, and now they are living on meager Social Security and distributions from their assets.  This is for files run through the Fannie Mae or Freddie system between April 4/14/20 to 5/17/20.

This is PURELY my guess – but I think we are going to have a temporary harder time getting these loans, relying on Asset Income, approved as well.  If you are in this situation, I’d love to talk to you.  We may have other options.

If you have questions about Self Employment Guidelines for a Mortgage in 2020, please call Steve and Eleanor Thorne 919 649 5058 or leave us comments below.  Please call us before you do your taxes.  That way, we can go over all of your options, especially if you are getting income from a Side Hustle.