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Length of Self-Employment Mortgage Guidelines

With employers getting more and more creative in the way they hire, more and more would be homeowners with stable income find them self asking, “How long do I need to be 1099’d to get aEmployee Self Employed mortgage or how long do I need to be self-employed to get a mortgage.”  The guidelines for this were static for a long time and then loosened during the 2000’s.  Since the Great Recession, they tightened and have finally normalized to something predictable (and rational I might add).

While there are emerging subprime lenders that will allow bank statements as an alternative form of verifying income, the premium loans are still owned by Fannie Mae & Freddie Mac or insured by the FHA, VA or USDA.  Their guidelines are as follows:

FANNIE MAE (CONVENTIONAL):

Being 1099’d or owning 25% or more interest in a company makes you self-employed.

Fannie Mae generally requires lenders to obtain a two-year history of the borrower’s prior earnings as a means of demonstrating the likelihood that the income will continue to be received.

However, a person who has a shorter history of self-employment — 12 to 24 months — may be considered, as long as the borrower’s most recent signed federal income tax returns reflect the receipt of such income as the same (or greater) level in a field that provides the same products or services as the current business or in an occupation in which he or she had similar responsibilities to those undertaken in connection with the current business. In such cases, the lender must give careful consideration to the nature of the borrower’s level of experience, and the amount of debt the business has acquired.

FREDDIE MAC (CONVENTIONAL):

Being 1099’d or owning 25% or more interest in a company makes you self-employed.

A two-year history of self-employment is required in most instances to ensure that income is stable. When the Borrower has been self-employed for less than two years, the Lender must document that the Borrower has a two-year history of receipt of income at the same or greater level in the same or similar occupation in order to consider the income for qualifying. In addition, the Lender must consider the Borrower’s experience in the business before considering the income for qualifying purposes. The Borrower’s individual federal tax returns must reflect at least one year of self-employment income. If the Borrower has been self-employed for less than two years or is relocating to a different geographic area, the Lender must consider the acceptance of the company’s service or products in the marketplace before considering the income for qualifying purposes. The Lender must document and explain how they determined that the Borrower’s income will continue at the same level in the new location.

VETERANS ADMINISTRATION (VA):

The VA doesn’t specify a level of ownership in a company that triggers being technically self-employed.  It’s safe to assume that an underwriter would use the same rule as Fannie Mae and Freddie Mac.

Generally, income from self-employment is considered stable when the applicant has been in business for at least 2 years.

Less than 2 years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.

FEDERAL HOUSING ADMINISTRATION (FHA):

Being 1099’d or owning 25% or more interest in a company makes you self-employed.

The lender may consider Self-Employment Income if the Borrower has been self-employed for at least two years.  If the Borrower has been self-employed between one and two years, the lender may only consider the income as Effective Income if the Borrower was previously employed in the same line of work in which the Borrower is self-employed or in a related occupation for at least two years.

RURAL DEVELOPMENT (RD):

The USDA doesn’t specify a level of ownership in a company that triggers being technically self-employed.  It’s safe to assume that an underwriter would use the same rule as Fannie Mae and Freddie Mac.

Income based on a two-year history of self-employment, in the same line of work, is an acceptable indicator of stable and dependable income.

Beyond meeting the requirements for length of self-employment, you’ll need to work with a loan officer who is knowledgeable about what documentation is necessary for underwriting and one that knows how to analyze tax returns.  This is because many do not know this and consequently don’t prepare an accurate Self-Employed Income Analysis prior to a loan going into underwriting; a must for a smooth loan process.  Often times loan officers will throw tax returns at an underwriter and hold their breath in hope.

It is a myth that mortgages are harder to obtain for self-employed people.  The guidelines are transparent enough.  If you work with a loan officer that knows what he or she is doing with self-employed underwriting guidelines and income analysis, the world of quality loan options should be just as open for a self-employed person as anyone else.

Charles Dailey – NMLS 79048 – Branch Manager, Loan Officer, Certified Military Housing Specialist – 612-234-7283 – charles@charlesdailey.com

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