Underwriting And Self-Employed Borrowers

Gustan Cho Associates

Given the new federal rules requiring lenders to verify applicants’ ability to repay before extending credit, it is easy to understand why self-employed borrowers present special challenges. And, if a lender chooses to comply with the new qualified mortgage rules, a self-employed borrower must also meet the 43 percent debt-to-income requirement. Qualifying self-employed borrowers often requires an additional commitment from underwriters in the form of time, energy, and persistence. If not for this additional commitment and special guidelines for self-employed individuals, many self-employed individuals might not be able to qualify for mortgage loans.

It is important to keep in mind that self-employed borrowers can apply for the same types of mortgages as other borrowers, including conventional mortgage loans as well as FHA-insured loans. The same loan terms—such as 15- or 30-year terms—are also available to self-employed borrowers on the same basis as other borrowers.

Mortgage lenders generally underwrite their loans based on guidelines established by Fannie Mae, the Federal Housing Administration, or the U.S. Department of Veterans Affairs. Fortunately, these organizations also offer underwriting guidelines for self-employed borrowers, and lenders typically follow these standards. In addition, some lending institutions have introduced special guidelines for use in making loans available to self-employed individuals.

Special Guidelines For Self-Employed Borrowers

In general, the following factors must be analyzed when evaluating a mortgage application from a self-employed borrower:

  • the stability of the borrower’s income (and the absence of significant variability in income)
  • the location and nature of the borrower’s business
  • the demand for the product or service offered by the business (in other words, whether there is a generally positive economic outlook in the applicant’s business sector)
  • the financial strength of the business
  • the ability of the business to continue generating sufficient income to enable the borrower to make the payments on the requested mortgage
  • the marketability of the property that is security for the mortgage as a private residence (rather than as the location of a business), since the property could be the source of repayment for the mortgage should the borrower’s business fail

Length Of Self-Employment For Self Employed Borrowers

Lenders typically must obtain a two-year history of the borrower’s prior earnings in order to demonstrate the likelihood that the borrower will continue to receive this income.

However, individuals who have been self-employed borrowers between 12 and 24 months may still be considered for a mortgage, provided the borrower’s most recent federal income tax returns show that he or she received income at the same (or greater) amount from a profession similar to the current business. In this case, the loan originator must carefully consider the nature of the self employed borrowers experience and the business’s amount of debt.

All mortgage loans will not be extended to self employed borrowers who have been self employed for a period of less than 12 months.

Freddie Mac does allow self employed borrowers with only one year tax returns if the self employed mortgage loan borrower can get an automated approval per LP FINDINGS, which is the LOAN PROSPECTOR, Freddie Mac’s version of the Automated Underwriting System.

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