Attention Self-Employed Homeowners!
Qualifying for a mortgage can be challenging when you are self-employed. Currently, conventional mortgage guidelines consider you self-employed if you have 25% or more ownership in the business or company.
Traditional Qualifying Requirements for the Self-Employed
Underwriters will commonly require you to prove you have been self-employed for at least two years and show that you have had stable income for the past two years. And of course that income must be sufficient to meet the debt-to-income ratio requirement.
By using one year’s tax returns, the underwriter will use only the income from that year, instead of averaging the self-employed income over a two year period. This can be very beneficial for newer business owners, as well as those who have experienced a down year in the past. It can also minimize additional requests for excessive documentation.
Stricter Guidelines for Newer Business Owners
Unfortunately, this rule is about to change effective March 6, 2017.
Freddie Mac will now require two years’ tax returns for any self-employed borrower who has been in business less than 5 years. If you have had the same business for over five years you will still be able to use just the most current tax return.
When applying for a loan, after you have sent in all of the required documentation your loan coordinator will complete the application and submit your file through an automated underwriting system (LP). The results will reflect the one year tax return requirement until March 6th, barring any unusual circumstances. Once your loan is submitted to the lender, the underwriter will have to confirm that the documentation satisfies the guideline completely.
Why is This Change Important?
It is important to note that the one year requirement means you need to have a filed tax return that reflects a full year of self-employment income. We cannot use a 2015 tax return if you started the business in February of 2015..