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.
How to Get Approved For A Self-Employed Mortgage
These are the steps to follow if you’re looking to buy a house or refinance a loan and would want to get approved for mortgage.
- Apply for your loan in-person, by telephone or online. Some of the notable information required in this step include your annual income, savings, debts, your locality, and your employment history.
- Your application is then forwarded to one of the bank’s employee referred to as an underwriter. The underwriter reviews your information to determine its authenticity. This includes making requests for supporting documentation and clarifications where needed. Your underwriter is at liberty to seek as much information from you as he deems right since it’s his job to make sure your loan application is feasible based on the minimum qualification standards set by the respective bank. For example, you may be required to explain and even show proof of the source of an unusual large deposit made recently, perhaps within the last 60 days. This process of reviewing loan applications is referred to as underwriting.
- If your underwriting stage is successful which means your loan meets all the set qualification standards, your loan can then be issued a “Clear-to-Close” status.
Worth mentioning is that the underwriting process doesn’t follow any specified pattern and will, therefore, vary from one applicant to another as well as depending on the type of loan. This means every mortgage borrower will be required to present specific documentation depending on what the underwriter considers right.
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.
There you have it. A comprehensive guide on the new Fannie Mae guidelines set to make the self-employed mortgage more of a reality. So, what does this mean to you? Well, it’s your perfect opportunity to consider taking that mortgage you’ve only dreamed about before. The hitherto stringent mortgage rules are gone. It’s your time to celebrate the newly found opening and own a home.