New COVID-19 mortgage rules for self-employed borrowers

New doc requirements for the self-employed

Both Fannie Mae and Freddie Mac have announced new standards for self-employed borrowers. Virtually all lenders will soon follow.

The new rules require self-employed borrowers to provide one or two new documents when applying for a mortgage: either an audited P&L statement, or an unaudited P&L statement along with 2 months’ business account statements.

If you’re self-employed and eligible, it’s still a great time to apply for a home loan or refinance. Rates are incredibly low and expected to stay that way.

In this article (Skip to...)

• Special consideration for self-employed borrowers
• New self-employed mortgage requirements
• Is it worth getting a mortgage is you’re self-employed during COVID-19?
• Unemployment benefits, PPP loans, and mortgage qualifying
• Background on PPP funding for self-employed workers
• What are today’s mortgage rates

Special consideration for self-employed borrowers

A lot of us are self-employed. The Pew Research Center, using government numbers, estimates that about 10% of us are independent contractors. That’s some 16 million people.

The self-employed raise several concerns for lenders. How do you prove income without a paycheck? Is there a real business? And are you sure the mortgage can be repaid?

Because of these questions, self-employed borrowers have always had more hoops to jump through when qualifying for a mortgage.

And, as for most borrowers, rules for the self-employed are changing due to COVID-19.

New self-employed mortgage requirements

The pandemic has changed the mortgage marketplace. Lenders want to know if the COVID-19 virus has caused a loss of income. That means lenders will one or more forms of paperwork.

“At a minimum,” says Freddie Mac, “the following additional documentation must be obtained when assessing income from self-employment:”

• An unaudited year-to-date (YTD) profit and loss statement that is signed by the Borrower and reports business revenue (i.e., gross receipts or sales), expenses, and net income. The information in the YTD profit and loss statement must cover the most recent month preceding the Application Received Date and be dated no more than 60 calendar days prior to the Note Date, and
• Two months of business account statements no older than the latest two months represented on the YTD profit and loss statement.
  • For example, if the YTD profit and loss statement is through May 31, 2020, the business account statements can be no older than for April and May
  • Personal asset account statements evidencing business deposits and expenses may be used when the Borrower is an owner of a small business and does not have a separate business account

Or, instead, borrowers can provide:

• An audited YTD profit and loss statement reporting business revenue (i.e., gross receipts or sales), expenses, and net income. The information in the YTD profit and loss statement must cover the most recent month preceding the Application Received Date and be dated no more than 60 calendar days prior to the Note Date

Note that ‘age of documentation’ requirements have changed, too.

Lenders have always wanted recent documents, but now what they want is more recent.

For instance, it used to be that documents four months old might be acceptable. But the new standard is generally two months.

Is it worth getting a mortgage if you’re self-employed during COVID-19?

If you are financially qualified, and if you want to finance or refinance a mortgage, lenders are open and have adjusted to the COVID-19 pandemic.

Your business is welcome — and given interest rates below 3% for strong borrowers, this is a very good time to speak with lenders.

However, you will find that some things have changed, largely as a result of the need for social distancing.

• Lenders are moving mortgage applications online
• The likelihood is that you will not physically see a mortgage loan officer. Loans are more frequently originated online and with telephones
• Appraisals may not include interior property reviews. Owners may be asked to supply indoor photos
• There may be no appraisal. Borrowers may be given the option to instead use automated valuation models (AVMs)
• Property inspectors may not go indoors. For details speak with local professionals
• Physical closings have become rare if not impossible in some areas. E-closings are here
• Many lenders are able to get account information directly from banks, mutual funds, retirement firms, etc. Electronic systems save time

For details and specifics speak with local lenders. For tax questions, be sure to work with a tax professional such as a CPA, enrolled agent, or tax attorney.

Unemployment benefits, PPP loans, and mortgage qualifying

Generally, unemployment benefits are not seen as qualified income for mortgage borrowers.

Fannie Mae says it recognizes that “many unemployed and furloughed individuals are eligible for unemployment benefits under the CARES Act.”

“Unemployment compansation is short-term in nature,” and as such cannot be used for mortgage qualifying —Fannie Mae

“However,” says Fannie, “unemployment compensation is short-term in nature and is therefore not a reliable and predictable source of income for borrowers who are not established seasonal workers.”

Many workers have also been furloughed. Though there may be an expectation of re-employment, there is no guarantee that an individual will actually be re-hired or that their salary will be the same.

Thus, furloughed workers are generally not eligible for mortgage financing.

Self-employed borrowers may also be wondering about PPP. As a large loan, will PPP affect your debt-to-income ratio when you apply for a mortgage?

If your PPP loan is forgiveable, it shouldn’t affect your debt-to-income ratio for mortgage qualifying.

Fannie Mae says, no — at least for now. But if it’s determined that PPP loans have to be repaid, that could change.

“Under the CARES Act,” said Fannie Mae, “PPP loan terms allow deferred payments for a specified period, no personal loan guarantee, and the potential for all or some portion of the loan to be forgiven.”

“Therefore, no payments would be expected to be included in the borrower’s liabilities at this time. Once it has been determined that any portion of the PPP loan must be repaid, follow the Selling Guide requirements for loans paid by a business.”

Background on PPP funding for self-employed workers

The $349 billion Payroll Protection Program (PPP) was passed by Congress earlier this year as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It was designed to assist small businesses — including the self-employed — impacted by the COVID-19 pandemic.

The PPP rules are complex and likely to change. Some or all of the money obtained under the PPP program may both forgivable and untaxed. Or maybe not.

Recently reformed to be more flexible for recipients, PPP requires:

• Small businesses to spend 60% of their PPP funds on payroll costs
• The remaining 40% of the money may be used for utilities, rent or mortgage, and interest on loans
• The money must be spent within a 24-week framework

The general PPP guidelines often do not work for the self-employed, because they typically don’t have payrolls. Independent contractors instead can get “owner compensation replacement” money roughly equal to eight weeks of 2019 income.

“Instead of spending your funds on payroll,” explains Bench.co, a bookkeeping service, “you can automatically get eight weeks worth of net profit forgiven, without having to spend it on anything.

“This is called ‘owner compensation replacement’ — it makes things nice and simple. The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven.”

What are today’s mortgage rates?

Mortgage rates have hit record lows three times in recent months. They’re still low and expected to stay that way for a while.

If you’re self-employed and looking for financing right now, it’s still a good time to apply. The rules are a little stricter, but the benefits of buying or refinancing at today’s rates could be huge.