There was some breaking news this week from Freddie Mac ( the Government-owned backer of many conventional mortgages ) in regards to what documentation Self Employed Borrowers will now need to provide to a mortgage lender to prove their income is still sufficient to qualify for a mortgage.
As most everyone knows, almost all mortgages that are still available in the US post-COVID shutdown are now backed by one of the biggest agencies of the Federal Government, Freddie Mac. Other agencies including Fannie Mae, FHA, VA, and the USDA will most likely follow suit if they haven't already updated their guidelines. This change means almost all mortgage lenders now need to adhere to these new policies if they want their loans they originate to be eligible to be purchased by any of these entities. Freddie Mac came out on 5.28.2020 with its latest bulletin. Part of their updated guidance includes what lenders will now need to ask for from any borrowers seeking a mortgage if they are self-employed.
Among the changes now required are below:
Minimum additional documentation requirements
At a minimum, the following additional documentation must be obtained when assessing income from self-employment:
- An unaudited year-to-date (YTD) profit and loss statement that is signed by the Borrower and reports business revenue (i.e., gross receipts or sales), expenses, and net income. The information in the YTD profit and loss statement must cover the most recent month preceding the Application Received Date and be dated no more than 60 calendar days prior to the Note Date, and
- Two months business account statements no older than the latest two months represented on the YTD profit and loss statement
- For example, if the YTD profit and loss statement is through May 31, 2020, the business account statements can be no older than for April and May
- Personal asset account statements evidencing business deposits and expenses may be used when the Borrower is an owner of a small business and does not have a separate business account
Or
- An audited YTD profit and loss statement reporting business revenue (i.e., gross receipts or sales), expenses, and net income. The information in the YTD profit and loss statement must cover the most recent month preceding the Application Received Date and be dated no more than 60 calendar days prior to the Note Date.
Reviewing YTD profit and loss statements, business account statements and other relevant documentation
- The Seller (meaning the originating lender) must determine if the business revenue, expenses and net income documented in the unaudited YTD profit and loss statement are reasonably consistent with the revenue and expense cash flow documented on the business account statements
- If the information on the YTD profit and loss statement is not reasonably consistent with the information on the business account statements, additional documentation (e.g., month-to-month or quarterly trending for YTD profit and loss, additional months and/or more recent bank statements) must be obtained to support the information and resolve the discrepancy
- If the unaudited YTD profit and loss statement cannot be supported by business account statements and/or other documentation, the self-employment income is not eligible for use in qualifying
- If the unaudited YTD profit and loss statement is supported, or if an audited YTD profit and loss statement is used, proceed to determine the current level of stable monthly income as outlined below
These new documents will need to be analyzed to see if the prospective borrower's income has changed for the better or worse due to the current environment and then recalculate their income numbers based on this updated documentation.
Over the last 2-3 months, the mortgage industry has changed dramatically. Make sure you check with your local lender to be sure they are up to date with these major changes.
If you would like to read the full bulletin 2020-19 from the Freddie Mac Selling Guide then - click here:
Michael Cantwell.
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