Self-Employed Can Expect Less Paperwork for Mortgages

Picture this…it’s 2016, and you just finished watching Stranger Things.  Whoa.  Between the 80s nostalgia and figuring out the upside down, you had to binge the whole series.  Unfortunately that put you a little behind on getting all your documents in order for your mortgage.  You’re self-employed, so you have to empty all your filing cabinets and provide every piece of paper you’ve ever encountered to secure this loan.  

Flash forward to 2021.  A few key events have happened since then.  Stranger Things has a sequel (also awesome), Beyonce had twins, and somehow Pete Davidson was dating Ariana Grande.  However, the only one really relevant to this blog post is that mortgages for the self-employed have gotten a tad more efficient thanks to some changes in 2018.  A Nightmare on Loan Street Blog has only been around for a few months, so I want to take some time to review some key changes to the mortgage process for the self-employed that happened in the not too distant past. 

Overall, there’s less paperwork to do for mortgages for the self-employed (and “regular salaried” employees).  If you remember, back in the day you had to provide tax returns, bank statements, credit reports, your 5th grade report card, mom’s recipe for chicken turnovers, and a whole host of other papers.  While the actual requirements are different from lender to lender, the amount of paperwork is simply less now.  Whew.  That’s a relief, right?!?

If you own a business, prior to these changes, you had to show two years of federal tax returns.  This was ok unless you were in business for, you know, like two years or less.  Now, small business owners are only required to show one year of tax returns.  The key though is that the single year’s federal tax return needs to show sufficient income for the loan.

What about Fannie Mae borrowers?  Well they got a break too.  Let’s say you’re just getting started with your business and don’t take regular distributions (or any at all).  Or maybe you’re killing it and would rather keep your capital in the business initially.  In either case, you’d just need to show access to the business income - enough to cover the loan.  

There’s a third group who also had a paperwork reduction: Los Angeles Clippers fans.  After getting Kawhi Leonard and Paul George and then choking away a 3-0 lead in the second round of the 2020 playoffs, these people definitely needed all the help they could get.  I’m kidding (sympathies to Clippers fans though).  

There is actually another group who saw a change - those who have mixed income like: pension and dividend income, social security, small business profits…you name it.  It used to be that if you were in this boat, you had to provide paperwork on all sources of income.  But that’s out the window.  Now, if you qualify for the loan with your traditional income, you won’t have to waste a tree showing the business or secondary income. 

Since you’ve read a handful of paragraphs, I want to throw in *Phil’s Special Disclaimer* at this point: this information is applicable to conventional loans.  If you’re seeking an alternative type of loan, things may be a little different.  Same goes for FHA or VA loans - the process of verifying your income may be different.  

There you have it.  Less paperwork for the self-employed.  And mom’s secret family recipe for chicken turnovers is safe forever.