Written By: Glenn Michaels, Op-Ed Writer
In the forty (40) years that I have been in the mortgage industry the self – employed borrower has always been the borrower with the most difficulty in obtaining mortgage financing.
For a long time the self – employed borrower was able to obtain financing without substantiating their income as long as they had good credit, good cash down payments, good savings and were willing to pay a little bit more in the rate or in the points to make up for the risks associated with these loans.
The so called “mortgage meltdown” eliminated most of the loan programs where a borrower did not have to substantiate their income. Now there are a few lenders with these programs but the borrower must meet very stringent credit guidelines or asset verification guidelines.
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Many of the self – employed borrowers either cannot qualify or find lenders offering programs where the income has to be substantiated.
The agencies (Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Housing Administration (FHA), and Veterans Administration (VA), all allow self – employed borrowers providing they can demonstrate at least a two (2) year history of self – employment with an upward income trend. If a self – employed borrower cannot demonstrate an upward earnings trend could lead to a loan denial.
The other issue as an underwriter is deficient income documentation along with incorrect calculation of the self – employed borrower. Fannie Mae attempted to assist everyone in the mortgage industry to determine the self – employed income borrower by developing and issuance of their form number 1084. This form makes it quite easy to calculate the income that will be used to either qualify or deny the bower. In addition if you follow the form it indicates what tax form(s) must be utilized depending on the borrowers’ type of self – employment.
The earnings trend can also be seen using the form as well.
In order to assist everyone that is calculating self – employment income, the following forms should be in a file:
Sole Proprietorship
• US Federal 1040 with all schedules
• Schedule C (Profit and Loss from business)
• Schedule D (Capital Gains and Losses) if any.
• Audited Profit and Loss Statement if the income is older than 90 days or copies of the quarterly filings along with a IRS form 4506 – T to verify the quarterly filings.
Partnership (General and Limited)
• US Federal 1040 with all schedules
• Schedule E, Part II (Income or loss from Partnership)
• Schedule K – 1 1065 (Partner’s share of income, loss, etc.)
• Form 1065 (US Partnership return)
• Audited Year to date Profit and Loss Statement or Quarterly filings along with the IRS form 4506 – T if the income is over 90 days.
• Partnership Agreement may be required.
S Corporations
• US Federal 1040 with all schedules.
• Schedule E, Part II. (Income or loss from S Corporation)
• Schedule K – 1 1120S (Shareholders Share of Income)
• Form 1120S (income tax return for an S Corporation
• Audited Year to date Profit and Loss Statement or copies of the quarterly filings along with the IRS form 4506 – T if the income is over 90 days.
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Corporations
• US federal 1040 with all schedules.
• Form 1120 (US Corporate Income Tax Return)
• Audited Year to date profit and loss statement or copies of the quarterly filings along with the IRS 4506 – T if the income is more than 90 days old.
Utilizing the Fannie Mae form 1084 the self – employed borrower’s income is easily calculated as well as a landlords income.
About The Author
Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
