Blog Category: self-employed

Hourglass Time Clock

I Need To Be Self-Employed For Two Years?

I had a self-employed borrower call me recently asking for a quote on an interest rate. She said she had been pre-qualified by someone else and just needed an interest rate quote. I asked her to fill out my pre-qualification form anyway and she agreed. It’s a good thing she did. I discovered an obstacle to her loan approval. She was never going to get her loan approved in her current situation, and she was wasting her time making an offer.

How Do Self-Employed People Determine Their Income?

Why was she wasting her time?

Because she was only self-employed for six months! The mortgage guidelines say that you have to be self-employed for two years before you can qualify for a mortgage. Six months of self-employment will not work. Twenty four months minimum is the rule. There may be some scenarios where an exception can be made, but that is considered under certain restrictions.

Lenders Do Not Know How To Pre-Qualify Borrowers?

Lenders don’t know their own self-employed guidelines?

It is astonishing that some lenders do not ask sufficient questions to make sure that a buyer is accurately representing their qualifications in a contractual real estate situation. As a result, mortgage borrowers are going to have do the research to make sure that what they are being told is correct.

To contact me to discuss your scenario, mortgage rates, or other mortgage questions, click here to schedule a call or you can email me directly.

business person money

Self Employed People Cannot Use Money From Their Own Business?

The mortgage rule makers say that self-employed mortgage borrowers can’t use money from their business accounts for a mortgage. Not without some explanation anyway. Why? It’s their money! You would think they would know best what to do with it. Yet, Fannie Mae and Freddie Mac say that they don’t want a self-employed mortgage borrower to use funds from their business bank accounts without some further analysis.

What’s the problem?

Fannie Mae and Freddie Mac worry that taking assets out of a business bank account may materially and negatively impact the operation of the business. So they want further analysis as a result.

Is there a solution?

There is the possibility to allow the withdrawal of funds from business bank accounts. If the self-employed mortgage borrower’s accountant writes a letter stating that the withdrawal of funds from their business bank accounts should not adversely affect the operations of the business.

Some accountants object when approached for a letter like this. They feel it puts them on the hook. Yet, I have had many accountants write such a letter. And some other self-employed mortgage borrowers have chosen simply to use their personal bank accounts instead of their business bank accounts. Writing such a letter does not put an accountant on the hook when they use words like “should not” as opposed to “will not”. I know it still seems silly in some situations to have to get such a letter. But it is indeed a Fannie Mae/Freddie Mac requirement.

2018 UPDATE: There is a more specific rule to follow now, those guidelines are below.

“The lender may use discretion in selecting the method to confirm that the business has adequate liquidity to support the withdrawal of earnings. When business tax returns are provided, for example, the lender may calculate a ratio using a generally accepted formula that measures business liquidity by deriving the proportion of current assets available to meet current liabilities.

It is important that the lender select a business liquidity formula based on how the business operates. For example:

  • The Quick Ratio (also known as the Acid Test Ratio) is appropriate for businesses that rely heavily on inventory to generate income. This test excludes inventory from current assets in calculating the proportion of current assets available to meet current liabilities.Quick Ratio = (current assets — inventory) ÷ current liabilities
  • The Current Ratio (also known as the Working Capital Ratio) may be more appropriate for businesses not relying on inventory to generate income.Current Ratio = current assets ÷ current liabilities

For either ratio, a result of one or greater is generally sufficient to confirm adequate business liquidity to support the withdrawal of earnings.”

What does this mean?

This means that lenders now have to analyze how much cash is left in the business after the withdrawal of business funds for the new house purchase. And they must determine if the cash left in the business accounts meets one of the above ratios.

A real life example

I had one self-employed mortgage borrower who had $240,000 in her business accounts, and did not keep much money in her personal accounts. She ran a home based consulting business and was well established. During a refinance transaction an underwriter asked for her accountant to write a letter stating that the withdrawal of funds from their business bank accounts to cover the closing costs should not adversely affect the business.

Who could not see that a home based business with low overhead and minimal expenses could easily afford to take $4,000 out of her $240,000 business accounts to cover the closing costs on her refinance?! Keep in mind we had copies of her tax returns to show her business expenses were around $10,000 a year. She could not hurt her business by taking the $4,000 out of a business account with such a large balance. A circus animal could have made that call without getting a letter from an accountant!

You know what happened, don’t you? Yes, I got the letter from the accountant. There was no way around it per the underwriter.

To contact me to discuss your loan scenario, mortgage rates, or other mortgage questions, click here to schedule a call or you can email me directly.

Self employed Freelance

Self-Employed Mortgage Borrowers Need 1 Or 2 Years Of Tax Returns?

I constantly get questions about whether or not someone who is self-employed needs a minimum of two years of tax returns, or if they can get away with one year of them, when qualifying for a mortgage. I thought I would answer this question and put it to rest. Please realize guidelines can change in the future. As of the date of this blog, the hyperlinks below are guidelines related to the history that self-employed people need, and the number of years of tax returns they need to document their income. Read More