Self Employed Mortgages Just Got Even More Difficult (COVID Changes)

Certified Mortgage Advisor
NMLS 1701021
December 1, 2020

Why is it difficult to be self employed during pandemic?

If you are self-employed getting a mortgage just got incredibly more difficult because of COVID. It's already been difficult to get a mortgage if you're self-employed right because you have income that's fluctuating, you also have business expenses that you're most likely writing off so that your net profit is lower than your actual revenue. And COVID has created so much uncertainty.

New rules from lenders

The lenders have put in new rules. So we're going to explain what these rules are for conventional loans and FHA loans. So lenders want what most guidelines say that they want the stable and reasonable expectation of continuance with income and employment. Their main goal is to see if your income is stable. Do they want to see if you have been receiving it over the past two years? Do you anticipate receiving that in the future?

Conventional loan

Because COVID has caused so much uncertainty, especially with self-employed buyers, they're putting in these extra standards.

YTD, P&L are normally required

So normally on a conventional loan, you have a year to date, profit, and loss, and this is normally required. Almost like a pay stub. So if you're a W2 employer, you're giving a pay stub to a lender, but when you're self-employed, you're giving a profit and loss, most of the time kind of to show your year to date earnings that your tax returns don't show.

Cash Flow Analysis (1084)

Then the lender is going to use, what's called a cash flow analysis. That's what we call Form 1084, which the lender uses to determine what income you showed over the past two years. Now that just shows the average past two years of income for that calendar year. It doesn't actually show your year to date.

So for instance, we're in almost December 1st right now. So a lender would only be able to see 2019 and 2018 income, but not actually 2020 income. And since COVID has happened. Lenders want to make sure that your income has been stable over 2020 and beyond for however long this lasts. So that's why they want a profit and loss.

Audited YTD P&L

You have two options here. Option one is getting an audited year-to-date, profit, and loss. This needs to be audited by a third party. If you have that perfect. That's all that you need. If it's unaudited and for a lot of self-employed people they're turning in an unaudited, profit and loss, mainly because it's expensive to get your profit and loss audited, or maybe you don't have a designated accountant or CPA.

Unaudited YTD P&L

So if you have an unaudited year-to-date profit and loss, it gives to. You're going to have to submit three months of your bank statements. Now, this used to be two months, that was the standard guideline on conventional loans. But now it's three months, a lender wants to see three months of your bank statements to back up the income that you showed on your profit and loss.

Lenders needs to see consistency

So obviously this is lenders reaching a little bit. They're trying to see, you know, do you have a consistency of income with what's been happening with COVID now really quickly. If you liked this video, go ahead and give it a thumbs up.

Now let's talk about FHA

So FHA is even more strict than the conventional side because what they actually want now is they say they want one of the following on an FHA loan for a self-employed buyer. They want evidence of current work. So things like executed contracts are signed invoices or evidence of current receipts within 10 days of the closing date. So they want to see that the business is still operational.

FHA stricter because of COVID

Now, this is huge because this didn't use to exist. This wasn't a requirement before COVID happened. Lenders now want to make sure that you have your business is still ongoing. It's still receiving income. Still has the ability to pay you so that you can pay back this.

FHA wants to verify your business using outside sources

On top of that, a lender has to certify that the businesses are open and they're normally going to do this through a phone call or verifying an online listing. Then they're also going to look at the business website, demonstrating the activity, supporting current business operations. So basically they want to see that as you function as a business and they can verify that more than just you saying it.

They want to be able to see that you have an online presence that they can verify you have money coming into your business. This is a little bit overreaching but this is the guideline that's been given by FHA because of the uncertainty with COVID.

Prepare your documents

So all in all, if you're looking at these loans, you just be prepared to have these documents ready. If you're self-employed, and getting a loan during this time for the foreseeable future, until the uncertainty with COVID ends, these guidelines are most likely going to stay in place and may become even more strict depending on how this pandemic plays out over the next few months.

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