Self Employed mortgage borrowers now have an easier time getting a loan

re you looking to purchase a home? Are you self-employed? The rules
to make this happen just got easier. Freddie Mac has recently announced
upcoming changes on how vendors can use your income to qualify you for a
home.
If you are a self-employed
borrower, lenders will be looking at your loan application with a finer
tooth comb then they would if you were a W-2 wage earner. What this
means is that your loan is considered a higher risk to the investor. As a
result, if you are self-employed, that take into consideration an
average of your income over the last 24 months (2 years) in order to
calculate your monthly earnings. In some circumstances, one year of
income tax returns will be permitted to qualify for financing. When your
lender uses 24 months of income tax returns, that can be a challenge
for a self-employed individual because on year might have been great but
the year before may have been less so. Taking the average of a good
year and a bad year will severely cut your buying power.

For example, let’s say that your 2015 tax returns
were very strong but your 2014 tax returns were very low. The average
of those two years income would lower your monthly income, even if your
current income is higher. Even if your business has significantly
improved since then, the average of those two years would determine your
qualifying ability.

What is the change that has recently been announced?

Freddie Mac is a little more flexible for self-employed borrowers
than Fannie Mae because their methods for interpreting self-employed
individuals has changed. If a self-employed borrower has been in
business for at least five years, you can use one year of your most
recent federal income tax returns in order to qualify. This change
allows your lender to use your most recent tax return and only average
your earnings over a 12 month (1 year) period. The benefit of this is
that if the previous year’s income was a lot lower than usual, that “bad
year” will not hurt your chances of qualifying as much as it would have
before this change.

If a self-employed borrower has been in business for less than five
years, they will still need to show the two years of income tax returns
and the standard 24 month averaging would commence. In such an instance,
a sole proprietor or schedule C borrower will need to show two positive
years in order to offset the bad year, potentially creating a larger
tax liability.

The benefit here is that using one year of income tax returns in
order to qualify for financing is a radically simplified way for a
self-employed individual to successfully procure mortgage financing.
Where before there were more obstacles for a self-employed borrower, now
there are fewer hoops for many of you to jump through. This is a game
changer for any self-employed borrower in business for five or more
years who has yet to file their 2016 income tax returns and are looking
to get a mortgage. Speak to a licensed loan professional to get more
information.