In the world of mortgage origination and underwriting, the greatest focus is limiting risk. COVID-19 has caused underwriting guidelines to get a little tighter as millions are unemployed, furloughed, and going into a forbearance status on mortgage payments. Today, I’ll focus on the tighter guidelines for self-employed buyers.
The guidelines can change depending on the lender you use. For example:
- One lender now requires that self-employed borrowers asset statements show 6 months of “reserves” to cover mortgage payments after closing. That means that the borrower’s bank statements must show enough available cash, after closing, to cover 6 months of mortgage payments.
- One lender now requires an audited profit and loss statement from the most recent month to verify recent business performance (The word “audited” got my attention and I don’t believe I’ll be working with them on self employed buyers anytime soon).
- Another lender now requires the following for self-employed borrowers:
- Year to date profit and loss statement showing income consistent with previously filed tax returns.
- Most recent three months of bank statements showing deposits consistent with sales / gross receipts specified on the P&L statement.
- If the monthly statements show declining deposits, the underwriter will determine if the revenue decline results from an interruption from COVID or some other reason. Ultimately, the underwriter will want to determine that the income is “stable and likely to continue” before approving the loan.
In this economy, it is wise for self-employed home buyers to review their filed tax returns and recent business performance and bank statements with their loan officer before searching for new homes. A loan originator who understands new underwriting guidelines and will take the time to review details up front can save borrowers time, money, and potential disappointment.
Working at Dunwoody Mortgage, I represent some national mortgage companies that have not implemented stricter standards for the self-employed. If you know a self-employed person who wants to buy a home in Georgia, please connect that person with me. I will invest the time needed to best position the self-employed for underwriting approval in this changing and challenging mortgage world.
