Fannie Mae and Freddie Mac released a new policy last week that has HUGE implications for self-employed borrowers. Here is exactly their new policy says-
Income from a business that has been negatively impacted by changing conditions is not necessarily ineligible for use in qualifying the borrower. However, the lender is required to determine if the borrower's income is stable and has a reasonable expectation of continuance.
Due to the pandemic's continuing impact on businesses throughout the country, lenders are now required to obtain the following additional documentation to support the decision that the self-employment income meets our requirements:
- An audited year-to-date profit and loss statement reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application date.
- Or an unaudited year-to-date profit and loss statement signed by the borrower reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application date, and two business bank account statements.
The lender must review the two most recent depository account statements to support and/or not conflict with the information presented in the current year-to-date profit and loss statement. Otherwise, the lender must obtain additional statements or other documentation to support the information from the current year-to-date profit and loss statement.
Further underwriters will be forced to assess not only the income and expenses of a business; but also their assets, their OPERATIONS and their STABILITY. Honestly, I don't think most mortgage underwriters are really qualified to do this as they are not Small Business Loan Underwriters. Thus, I expect those underwriters to be incredibly conservative and thus many loans will not get approved.
It appears that Fannie and Freddie's assumption is that each and every business has been negatively impacted by Covid-19 and each business owner must prove this is NOT the case.
This policy goes into effect on all new loan applications submitted June 11th or after.