Big Changes for Self-Employed Borrowers
Coming March, 6th 2017
If you’re a business owner, and thinking about buying a home in the next 12 months, we need to talk now!
I love working with business owners. I believe small business owners represent everything America is supposed to be. Small business owners risk everything, in exchange for the chance to have the pride and sense of accomplishment, of knowing they depend on no one and have created their own success.
However, it can often be more challenging to get self-employed borrowers approved for mortgage loans on the homes that they’ve worked so hard for. This is due to the natural fluctuation in markets, ebbs and flows as businesses prepare for growth, and the need to minimize tax liabilities that all impact a business owner’s financials. Too often, business owners meet loan officers that are either too inexperienced, or too lazy, to figure out a way to get mortgage loans approved for self-employed borrowers. I’ve worked plenty of very complex deals, and I can sincerely promise my self-employed clients that if there’s a way to get there deal done, I’ll find it.
Unfortunately, the mortgage industry as a whole is losing one of the most valuable tools that I’ve used to help get mortgage loans approved for business owners. Historically, business owners have had to provide two years of business and personal tax returns for loan officers to use for income calculation. This income is averaged over 24 months. There’s a few common situations where this presents a problem.
First, this is almost always a problem for newer businesses. When a business owner is in his/her first year of business, they’re almost always going have significant losses due to start-up costs. A good CPA is going to make sure and fully document these losses to limit tax liability. So even if the business owner has great revenue the following year, these earnings are going to be mitigated due to their loss in the first year.Secondly, most business experience down years from time-to-time. Whether it’s from weather, industry-specific issues, or growing pains, it happens. So if a business has a great year, a down year, and then a record-breaking year, that poor peformance sandwiched in the middle is an issue because the income calculation will come from the average of the most recent 24 months.These are just a couple of examples, out of thousands of possible scenarios. What I’ve found from my experience working with a variety of business owners, is that the vast majority of owners are focused on running and growing their business. Very few are really tapped into their financials. That’s not to say they don’t know how much they’re spending, and making, down to the penny. It means they often don’t know how their CPA has made them look on paper for a specific year. So often, when I dig into the tax returns of even very established, profitable businesses, I still find anomalies for a specific year.For years, I’ve had a tool to use to combat issues like these. Freddie Mac offers an underwriting solution for otherwise well-qualified self-employed borrowers that allows loan officers to use the latest 12 months of tax returns, instead of having to average 24 months. This is a very powerful tool, that has helped me overcome many one-off issues, from otherwise very stable, self-employed borrowers.
Unfortunately an underwriting change is being launched for all mortgages to be delivered to Freddie Mac with settlement dates after March 6, 2017. For mortgages closing after this date, any business that has been in operations for less than 5 years, income calculations must be factored using the latest 24 months. This directly translates to a big impact to options for newer business owners. (Details of upcoming changes here)
Fannie Mae technically has a similiar option, the capability to move forward with one year of returns, with either Fannie or Freddie, is based on “automated underwriting findings” that allow for it. I normally get Freddie findings allowing this about 90% of the time. However, Fannie findings allowing a single year of returns basically never happens.
I’ll always work to find any possible way to get my self-employed clients into homes they’ve worked so hard for. I still have many options and resources. However, if you are self-employed, and thinking about purchasing a home anytime in the next 12 months, we should talk soon, and see if it’s appropriate to get started sooner in order to take advantage of options available now, that won’t be available the closer we get to March. Often, buyers are more prepared to buy than they think, and I can help them accelerate their timelines.
Give me a call at (214) 578-0474, or shoot me a note at email@example.com and we can figure out what’s best for you, your situation, and your goals.