By Dawn Ferreiro (NMLS 514152), Service First Mortgage and Member, CCAR’s REALTOR®/Lender Committee
One of the most common reasons that self-employed borrowers are unable to obtain mortgage financing is due to the nature of their tax returns, and specifically how much they are able to write-off on their return in relation to their reported profits. Currently, the Government-sponsored Enterprises, or GSE’s (Federal National Mortgage Association or Fannie Mae and Federal Home Loan Mortgage Corporation or Freddie Mac), along with the Federal Housing Administration (FHA) require that lenders underwrite a self-employed borrower’s income utilizing the net income on their return/returns as opposed to the gross income. REALTORS®, by the very nature of their own employment, are all too familiar with this scenario and it remains a common frustration for the self-employed individual.
Thankfully, we are now seeing a rise in the market place for Bank Statement Loans. These products allow us, as Mortgage Professionals, to qualify buyers without the use of W-2’s or tax returns. Borrowers who have been self-employed for a minimum of two years will be allowed to provide their bank statements in lieu of their tax return (bank statements may be personal statements, business statements or co-mingled statements, however certain caveats do apply in each of these scenarios). There is certainly a well-deserved place in the market for these types of products, as there are currently an estimated 15-16 million self-employed individuals in the United States. Projections indicate that 27 million Americans are expected to leave full-time jobs from now through 2020, bringing the total number of self-employed to 42 million.
That being said, there are a few things to bear in mind when it comes to these loans. First, it is important to note that the borrower is responsible for providing some type of accounting of the expenses incurred by their business. The following options are allowable:
- A Profit and Loss Statement prepared by the borrower’s CPA
- A Profit and Loss Statement prepared by the borrower
- An Expense Statement from a tax professional in the form of a letter outlining the borrower’s average expense percentage over a specific timeframe.
In addition, deposit and expense patterns must be reasonable for the type of business. If any single deposit exceeds 75% of the monthly average deposit balance, it will have to be sourced.
While these loans are non-QM (Qualified Mortgage) and Non-Agency (agency being FNMA, FHLMC, or FHA), that does not necessarily mean that they are higher risk. The loans are ATR compliant, meaning they fall under the “Ability to Repay” rule of Dodd Frank, in which creditors are required to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling. And, most borrowers with these loans will actually have good or excellent credit scores.
The typical profile of these loans purchased in Q2 of 2018 are as follows:
- 65% loan-to-value (35% down payment or 35% equity in the home for refinancing)
- 36% debt-to-income ratio (conventional loan products allow up to 50% in some cases)
- 699 FICO score
- $518,483 loan amount
With this information in mind, we certainly recommend reviewing your client database to identify those clients who were unable to purchase a home due to their self-employed status combined with a low net income reported on their return, to see if this exciting new program might be of benefit to them!
For these and other questions about lending, contact CCAR’s REALTOR®/Lender Committee at RealtorLender@ccar.net. And, if you’d like to join us, the REALTOR®/Lender Committee meets the second Tuesday of every month after the Plano Business Development Meeting (approximately 1 p.m.) in the CCAR Banquet Room.