The reason it seems like it is so hard to get a mortgage approved when you are self-employed is actually twofold. First, the document-gathering-discovery-phase is especially rigorous and second, the evidence requirements have so many more moving parts and potential landmines.
Just what is the liquidity test?
The liquidity test measures the ratio of liquid and near-liquid assets to current liabilities. There is no liquidity test for all regular W2 income folks.
Self-employed folks documentation begins with 2 years of tax returns; personal and business, all pages, all schedules, all everything. Add in the year-to-date Profit & Loss Statement, current Balance Sheet, a letter from an accountant proclaiming that the business has been a going concern for at least 2 years, preferably in the same location, and that use of any of the money on deposit in the business bank accounts will not adversely affect the business as a going concern. Even a copy of your business license may be required.
If salaries are paid as part of a self-employed buyer’s compensation, they will need to offer up paystubs and W2s just like regular W2 folks.
Once a self-employed borrower has submitted all of their income documents, the lender analysis and review adventure begins. The income analysis is actually pretty straightforward using standard FNMA worksheets to do the income calculation and averaging. The “numbers” plugin directly from the tax returns and the results are what the results are, pretty simple.
And the results are where the adventure begins to unfold….
Is the income stable year-over-year or is it declining? If it is declining, why is it declining and what is the evidence that it will change? Why was income reported on Schedule E one year and the next year the same income from the same source is now an LLC and reported on form 1065 and K1s? Is the income reported on the Year-To-Date Profit & Loss consistent with what was reported on last year’s tax return? And then there’s always that liquidity test!
Self-employed income analysis for mortgage financing is rife with nuance. The scope of the document requirements is extensive and the opportunity for GAAP (Generally Accepted Accounting Principles) landmines that can potentially torpedo an otherwise straightforward mortgage approval, are both obvious and not-so-obvious.
Depreciation, unreimbursed expenses, non-deductible meals & entertainment, stable & consistent income history, positive earnings trend, changes in reporting from year-to-year, liabilities payable in less than one year and on and on. The list is long and the potential pitfalls are many.
And the newest guideline; A Liquidity Test is now required when the borrower has no history of receiving “distributions” on their K1 income.
So for you self-employed home buyers, have documents ready before you ask them about rates. The answer could be the difference between home-ownership and avoidable frustration.
BUT I CAN OFFER YOU A SOLUTION TO THESE TOUGH SELF-EMPLOYED GUIDELINES!
By keeping your loan within our Fidelity Bank Mortgage portfolio, we are able to offer more flexible requirements. Therefore, we do not have to adhere to the more stringent guidelines above. Perfect for you if you are self-employed!
Minimum FICO 740
LTV ratios up to 80%
Loan limits up to $2,000,000
Maximum allowable DTI 55%
5/1, 7/1, 10/1 amortizing ARMs and 15 & 30 Year Fixed options available
No serious derogatory credit in the past 24 months
Asset Dissipation/Depletion is allowed with this product
Reserve Requirements: DTI ≤ 43% = 6 months; DTI > 43% - 50% = 12 months; DTI > 50% - 55% = 18
Contact me for more information on this valuable loan program.
Kim Jones-Zweig, Senior Mortgage Banker at Fidelity Bank Mortgage ~ firstname.lastname@example.org ~ 678.468.4046
Senior Mortgage Banker
Top Producer and
MBAG Platinum Award Member
Fidelity Bank Mortgage
304 Tribble Gap Road, Suite 200
Cumming, Georgia 30040
p: 678.468.4046 | f: 678.829.0612
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