If you are self-employed, you might wonder what type of mortgage you will be eligible to obtain. Do conventional loans even exist for the self-employed borrower?
Luckily, they do exist. Fannie Mae has guidelines that make it flexible for those that work for themselves to secure a mortgage without having to pay subprime interest rates and/or fees.
Keep reading to learn the guidelines for this conventional loan program below.
The Basic Guidelines
Any borrower that makes more than 25% of their income from self-employment must disclose the type of business and its location. They must also demonstrate a demand for the product or service that they offer as well as show the financial stability of the business. Finally, Fannie Mae requires that the business prove that they have the capital and ability to generate future income with the business.
In order for the lender to be able to consider your self-employment income, you must have a 2-year history of receipt. If you don’t have a 2-year history, you may still be able to qualify for the loan if you are able to prove that you have experience in the industry. For example, if you left your job as an accountant to open your own accounting service, you can prove that you have the expertise to make the business work.
Typically, a lender will need to make sure that your income from the business is in line with the income you received when you were employed. In other words, if there is a drastic decrease in income on your tax returns, a lender may not be able to use it. But, if it’s close to the income you made as an employee, a lender may use it.
Verifying Your Self-Employment Income
The tricky part is verifying your self-employment income. Fannie Mae has strict guidelines regarding how you can verify it. The lender needs to be able to prove beyond a reasonable doubt that you can afford the loan.
This means verifying your income with the following:
- All schedules of your tax returns over the last 2 years
- Copies of your IRS transcripts for the last 2 years
- Copies of your business tax returns unless you meet the exceptions below
You don’t need to provide your business tax returns if you meet the following requirements:
- You are using your own personal funds for the closing costs and down payment and not funds from the business
- You have owned your own business for at least 5 years
- Your personal income tax returns show increasing income over the last 2 years
The Lender’s Evaluation
Once you provide all of the necessary documentation, the lender must determine if your personal and/or business income is adequate. The lender will evaluate your personal tax returns and look at your business income or loss. This will give the lender the best idea of the cash flow you have and whether you can afford a mortgage.
The only exception to this rule is if your self-employment income isn’t your main income. For example, if you work a salaried job, but have a side hustle that you run yourself, the lender doesn’t have to evaluate your self-employment income as thoroughly as they would if it was your main income.
If the borrower doesn’t meet the requirements to waive the need for business tax returns, you will also have to supply two years of your business returns. The lender will evaluate these tax returns as they compare to other businesses in the same industry. They look for consistency and reliability to ensure that the business will continue moving forward and provide you with the necessary income for a mortgage.
Even though Fannie Mae requirements are usually much stricter than other loan programs, their self-employment requirements aren’t that strict. As long as you can prove that your income is consistent and stable, there’s a good chance you can use it for qualifying purposes on a conventional loan.