New Mortgage Guidelines Reduce Paperwork For Self-Employed Borrowers

Dan rafter
Written by
Dan Rafter
Read Time: 6 minutes

It might be getting slightly easier for self-employed borrowers to qualify for a home loan. Just make sure that the emphasis in that last sentence is on the word “slightly.”

Applying for a mortgage loan has traditionally required plenty of paperwork. And that’s especially true for borrowers applying for all mortgage types who rely solely or partly on self-employment income to qualify. Such borrowers have faced more scrutiny from mortgage lenders who are nervous that their self-employment income might dry up unexpectedly.

In a bit of good news for self-employed workers, Fannie Mae recently issued new guidelines regulating how lenders can treat self-employment income. These regulations don’t actually change much for self-employed borrowers, but they might reduce slightly the amount of paperwork these borrowers will need to send to lenders.

Self-employed borrowers, though, should still be prepared to send in plenty of documents to ease any concerns lenders might have about the stability of their incomes, even with Fannie’s changes.

Andrew Weinberg, principal with Silver Fin Capital Group in Great Neck, New York, said that lenders have always preferred working with traditional wage earners. It's simply easier to guesstimate whether these borrowers will have enough money each month to pay back their loans on time, Weinberg said.

"A W2 wage earner, with no bonus, commission or overtime, is certainly the easiest borrower income scenario to understand," Weinberg said. "It gets more complicated for self-employed individuals who might have several different income streams."

Self-employment challenges

The goal of Fannie’s changes is to make life at least a little easier for self-employed borrowers, an important step considering how many of them are out there. The U.S. Bureau of Labor Statistics said that as of 2015, 15 million people in the United States were self-employed. That came out to 10.1 percent of all U.S. workers.

If you are one of these workers, Fannie Mae's changes might make the mortgage-application process a bit less onerous. But you'll still have to work.

Lenders, for instance, will still require you to show paperwork that they can use to verify your self-employment income. Lenders still want to make sure that the money you earn is steady, and that it won't suddenly evaporate.

Lenders have always considered the income from regular salaries to be safer, money that is less likely to rise and fall during the year. Because of this, proving that their self-employment income is reliable is one challenge that hasn't disappeared for self-employed borrowers.

But even with this challenge, it’s far from impossible for self-employed borrowers to qualify for mortgages.

Jennifer Beeston, vice president of mortgage lending with the Santa Rosa, California-based office of Guaranteed Rate, said that it shouldn't be any more difficult for borrowers to qualify for a mortgage with self-employment income if they can verify that income.

"It is not harder for a self-employed buyer to get a home," Beeston said. "That is a common misconception and it is not accurate."

There is one area in which self-employed borrowers can run into trouble, though, and that's on their tax forms.

As Beeston says, self-employed borrowers tend to write off portions of their incomes in an effort to pay as little as possible each year in taxes. Doing that, though, reduces the amount of income lenders can use when determining if you qualify for a mortgage loan.

"If you make $100,000 gross but write of $90,000, you are leaving me $10,000 in income," Beeston said

That, of course, would be a problem, as $10,000 in income won't buy anyone much home. If you are planning to buy a home in the next year or two and you are self-employed, be careful when writing off expenses to leave enough income behind to qualify for a loan.

Less paperwork

Traditionally, self-employed borrowers have had to show lenders at least two years of tax returns showing how much self-employment income they’ve earned. Lenders would then take an average of the income shown on these returns, and use that figure as their borrowers' “official” annual income.

This made applying for a mortgage loan especially challenging for those borrowers who only recently became self-employed. Such borrowers might not have had a full two years of tax returns showing self-employment income.

The new Fannie Mae requirements, though, state that borrowers who don't have two years of tax returns showing self-employment income can now provide just one year of returns. However, these returns must show 12 full months of self-employment income.

Side income

What if you have both a full-time job and work a self-employed business on the side for extra cash?

Fannie’s new guidelines now state that you won't have to show proof of income from that self-employed side job if the money from your traditional, full-time job is high enough to qualify you for the mortgage for which you are applying.

If you do need that self-employed income to qualify for the loan, though, you will still have to show proof of it, even if you have a monthly salary from a full-time job.

This change could mean less paperwork for self-employed borrowers who juggle a full-time job with their side gig. However, it’s unclear how many lenders would ask these borrowers to provide proof of their self-employment income if these dollars weren’t necessary to qualify for a loan. The Fannie Mae change, then, might have little real-world impact.

The paperwork you will need

What paperwork will you have to show to lenders to prove that the self-employment income you earn is steady and reliable?

If you do have at least two years of tax returns showing self-employment income that is either consistent or on the rise, plan on sending copies of them to your lender. Lenders want to see that the income you are earning won’t be miniscule one year and sky-high the next. Such fluctuations could make it more difficult for you to make your mortgage payments each month, and lenders don’t like to see such instability.

Be prepared, too, to show copies of your bank account statements for at least two months. Lenders want to see that you’ve saved enough money to cover mortgage payments in case your freelance or self-employment income does take a dip during one or more months.

Finally, if you are paid by several different vendors as part of your self-employment business, your lender might require you to send copies of your various 1099 forms, the tax forms that list what each vendor paid you during the year.

So, yes, applying for a mortgage when you rely on self-employment income is still a challenge. Fannie’s guidelines might mean that you won’t have to send in quite as many tax returns, but that’s about it as far as big changes go.

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