New self–employed documentation requirements

FHA and Freddie Mac have both issued new self–employed borrower rules. Most lenders will shortly follow. Self–employed borrowers must now produce an audited P&L statement or an unaudited P&L statement together with two months’ business account statements when applying for a mortgage. Self–employed individuals can still apply for a house loan or refinance. It is projected that rates would continue low.

Borrowers who are self–employed are given special consideration

Many of us work for ourselves. Using government data, the Pew Research Center estimates that about 10% of us work as independent contractors. That equates to approximately 16 million people.

Lenders have several concerns about self–employed people. How do you prove income when you don’t have a paycheck? Is there a legitimate business? And are you certain the mortgage can be paid off? There have always been additional hurdles in the mortgage application process for self-employed borrowers because of these questions. In addition, as with most borrowers, the rules for the self–employed are changing as a result of COVID–19.

New mortgage requirements for self–employed individuals

The mortgage market has been altered as a result of the pandemic. Lenders want to know if the COVID–19 virus has resulted in income loss. That means lenders will require one or more types of documentation.

A signed unaudited year-to-date (YTD) profit and loss statement that reports business revenue (i.e., gross receipts or sales), expenses, and net income. For the YTD profit and loss statement to be valid, there must be no more than 60 calendar days previous to the Note Date.
Two months of business account statements, no more than two months older than the most recent two months represented on the YTD profit and loss statement.

Alternatively, borrowers can provide:

A YTD profit and loss statement that is audited and reports business revenue (i.e., gross receipts or sales), expenses, and net income. The YTD profit and loss statement must be no more than 60 calendar days prior to the Note Date.

It’s worth noting that the ‘age of documentation’ requirements have also changed. Lenders have always wanted recent documents, but now they want even more recent documents. Documents four months old, for example, were once considered acceptable. However, the new standard is usually two months.

Is it worthwhile to get a mortgage if you work for yourself during COVID–19?

Lenders are open and have adjusted to the COVID–19 pandemic if you are financially qualified and want to finance or refinance a mortgage. Your business is welcome, and with interest rates as low as 3% for strong borrowers, now is an excellent time to speak with lenders.

However, you will notice that some things have changed, owing largely to the need for social distance.

Mortgage applications are increasingly being submitted online by lenders.
You are unlikely to meet with a mortgage loan officer in person. Loans are increasingly being originated online and over the phone.
Interior property inspections are not always included in appraisals. Owners may be asked to provide indoor photographs.
There may be no evaluation. Borrowers may be given the option of using automated valuation models instead (AVMs)
Property inspectors are not permitted to enter buildings. Speak with local professionals for more information.
Physical closures are becoming increasingly rare, if not impossible, in some areas. E–closings are now available.
Many lenders can obtain account information directly from banks, mutual funds, retirement plans, and other financial institutions. Electronic systems help you save time.

Unemployment compensation, PPP loans, and mortgage qualification

Unemployment benefits, in general, are not considered qualified income for mortgage borrowers. Many employees have been furloughed as well. There is no guarantee that an individual will be re–hired or that their salary will be the same even if there is an expectation of re–employment. As a result, furloughed employees are generally ineligible for mortgage financing. Borrowers who are self–employed may also be interested in PPP.

Background on Public–Private Partnership (PPP) funding for self–employed workers

Congress passed the $349 billion Payroll Protection Program (PPP) earlier this year as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It was created to help small businesses, including self–employed individuals, affected by the COVID–19 pandemic. The PPP rules are complicated and subject to change. Some or all of the money obtained through the PPP program may be both forgiven and tax-free. Or perhaps not.

PPP, which was recently reformed to make it more flexible for recipients, requires:

Small businesses will spend 60% of their PPP funds on payroll.
The remaining 40% of the funds may be used for utilities, rent or mortgage, and loan interest.
The funds must be spent within a 24-week time frame.

The general PPP guidelines frequently do not apply to the self–employed because they do not typically have payrolls. Instead, independent contractors can receive “owner compensation replacement” funds equal to approximately eight weeks of 2019 earnings.