As time goes by, standards and laws guiding mortgages change. Whether to meet the needs of society or adjust to economic climate, some differences are bound to arise - some for better, others for worse. Fortunately, 2018 has brought about several beneficial changes for self-employed people seeking mortgages. This is especially good for business owners, but some of the new guidelines extend to other types of self-employment and nontraditional income. Let's take a look at what the guideline changes could mean for you! First and foremost, the amount of paperwork required for both self-employed and salaried (or other traditional income) is being reduced. For self-employed borrowers in particular, this can be a tremendous relief, as previous requirements could include federal tax returns, bank statements, credit reports, and so on. Requirements will still vary from lender to lender, of course, but the sheer amount will likely be far less than in years past.
More specifically, business owners without two years of federal tax returns are now only only required to provide one year's worth of this information. It should be understood, however, that this single year documentation will have to show credible, sufficient cash flow to indicate your income.
Fannie Mae borrowers with irregular (or non-existent) business distributions will now only be required to show access to business income, typically with enough liquidity to support the income needed to pay back a home loan. This may come as a relief to people with fledgling businesses that are doing well, but are not yet providing consistent distributions, or for business owners who choose to keep their capital within the business.
For borrowers who find themselves somewhere between traditional and nontraditional income - whether it's a combined income of pension and investment dividends, social security and small business profits, etc. - required paperwork will also be reduced. The previous standard required documentation for all sources of income. Now, borrowers who qualify through their traditional income alone will not have to supply financial information related to their business or other secondary income.
It's important to note that these new guidelines are for conventional types of home loans, and therefore may not apply to other, less common types of mortgages. As always, the exact requirements can vary among lenders, and if you're seeking an FHA or VA loan, the process of verifying your income may be different. Regardless of the type of home loan you seek, getting your financial documentation in order is a must, especially for the self-employed. Even with new guidelines, the more prepared you can be, the better. Even if some documentation isn't required, having access to your business's financials, distributions, and any other income information is a good idea. Being over-prepared never hurts!
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