For all loans this year where the borrower has ANY kind of self employed income feature, they will have extra steps to go through in 2010. This means that even if they have a very passive business or a rental property or anything like that, they’ll be put through the Spanish Inquisition of income documentation.
What’s more important as a Realtor, is that you’re working with a loan officer that is very proficient in tax transcript analysis and knows how to prepare an accurate Self Employed Income Analysis quickly (an example of this form is attached). The reality is that most loan officer either don’t have a clue how to do these or aren’t very proficient with them and end up stumbling through them and taking forever to figure out the “real” qualifying income.
It used to be that a lot of these borrowers qualified for their loans going “stated” or using a “liar’s loan.” Then, lenders starting pulling an IRS 4506t form that gives them a summary of the filed taxes and if it supported what was in the loan application, that was good enough. No more. Now, the self employed income analysis will need to be in there. For my own part, I’ll be putting the analysis form in there along with underwriting cover letters describing my basis for income calculation (a cover letter is just a narrative that get’s right to the point because some underwriters are dumb and the good ones are busy – I’ve attached an example).
If I were a Realtor, I’d be adding some steps this year to prepare for this. First of all, if you don’t already, you might want to help your loan officer collect documents for your buyer because it’s a lot for borrowers to do in a timely fashion but it’s necessary. Secondly, AND THIS IS IMPORTANT, when representing a seller and getting pre-approvals with purchase agreements, ask if the buyer is self-employed in any way shape or form. If they are, then follow up by asking for a copy of the income analysis to be certain that it’s been done because, if it hasn’t, that pre-approval isn’t worth the paper it’s written on. If they won’t show the income analysis to you, then make sure to get a hard financing contingency and/or add special language to the financing addendum. Here’s an example:
“If the buyer’s financing should fall through due to debt to income ratios, inconsistent income, failure to provide necessary income documentation and/or any issue concerning self-employment, buyer agrees to forfeit all earnest money to seller.”
This kind of language is not unfair because all of those grounds for loan denial are detectable in the loan origination process by a quality loan officer.
I’m attaching the announcements from Freddie Mac on this matter and have highlighted in yellow the relevant sections (Fannie is doing it too but I figured this was good enough). If you’re not sure if your loan officer is up to snuff on this, invite them over to your office and, without telling them, throw down your tax returns, tell them to do a self employed income analysis on you and judge for yourself.
Attachment – Freddie Mac Announcement 1
Attachment – Freddie Mac Announcement 2
Attachment – Self Employed Income Analysis
Attachment – Sample Cover Letter for Basis of Income Calculation
Charles Dailey - iLoan - NMLS ID# 79048 - CA DOC, MN DOC & WI DFI - 612.234.7283
The Home Buyers Scouting Report® is provided directly to the buyer by HBM II, a licensed national real estate brokerage service company, not to or through a lender. The FREE home finding service is provided directly to prospective homebuyers by HBM II and its real estate brokers, as part of their ordinary real estate brokerage services. HBM II, Inc. works cooperatively with other real estate agents across the United States in attempting to find ready, willing and able buyers for homes listed for sale. The role of the Preferred Loan Officer is to assist in determining a comfortable home price range for Home Buyers Marketing II, Inc. (HBM II) to use when it is searching for property listings within the buyer's search criteria.
Charles: Very good post! Most loan officers do not know how to work with self-employed borrowers b/c they're used to the old "stated" program. You're so right! Also, great advice for Realtors, especially for asking their clients if they're self-employed. Happy New Year!
This is good information for us to be aware of in the ever changing world of finance.
Awsome post Charles. Thanks for the heads up
very good information and kind of scary all at the same time... they just keep making it harder and harder to doour jobs and make a living... Lets Hope for a Happy and Prosperous New Year
Excellent advice Charles. Just when we thought it was safe to step back in the water....
Thanks Charlie Good information. At least I have a heads up on this now.
Thank you for the heads up, very good information you shared. It certainly has gotten harder to qualify a self-employed buyer for a traditional home loan.
I think many mortgage "brokers" just rely on the lender to tell them what they want. If working with a mortgage broker, yes, the real estate agent has to do more work. But I have a couple of excellent mortgage professionals who I can call, and they'll immediately fax or e-mail me what I need for that particular buyer. This way, I can stay focused on finding the right home for my clients.
Howard and Susan,
This may make stepping back in the water more safe, actually. I'm sure Maria can attest to this too but a lot of time, I'll look at someone's adjusted gross income without analyzing all of the schedules and see some low (or even negative) number and think I'm dead in the water before I start but I'm often surprised.
For instance, recently, I had a borrower from California buying a home for his daughter in Minnesota who had an adjusted gross income of 44 thousand dollars and he'd been turned down 6 times. After a full review of his personal and business tax returns (all 8 returns), his qualifying income was 123,221 dollars because of depreciation, amortization, business use of home and non-recurring losses. After hearing that, he didn't mind faxing over 200 pages.
I think that since reduced documentation loans have gone away, many self-employed borrowers have been sidelined by lenders not because of qualifying criteria but because, . . . . how do I say this, . . . lenders had staffed up with loan officers who were former gym membership salespersons who don't have the technical skill to use an abacus. . . . .? Is that too harsh?
Find someone who knows well how to do this and I think you'll be surprised at what your qualifying income really is.
Sharp tongue there, my boy.
Oh, I appreciate the info. I have a buyer who just might benefit from this type of information, so it's good that you put it out here.
Charles, great information. I will be reading in detail the attachements.
Charles--This is very good info and outlined very well so that we as agents can better understand what is required of any loan officer going forward with any self employed buyers. Thanks for the update!
Thanks for the post! I was just wondering about these new guidelines and self-employeeds. This info is vital! Happy New Year!
thanks for the info. The new guidelines and self-employeeds do not sound as if we are trying to cure the housing problem.
Thanks. I thought I had the self employment thing down to a science. The game has really changed.
Thank you for the information, I will be checking in with my preferred lenders to see where they are on this.
I'm going to be trying to get approved for a loan in about six months to purchase a home. I'm concerned about all of these new guidelines for myself and future self-employed clients I have. Thank you so much for posting all of this, much appreciated! Happy New Year Charles!
Charles,
Every guideline is tougher now. Thank you for letting us know of specific changes for self employed borrowers. We need all the information we can get.
Charles, very good information and you are on the money with guidelines and what self employed borrowers are facing - it is imperative that the loan officer knows how to complete the self employed analysis. If you are dealing with a loan officer that does not it can be hazardous to their clients - and themselves. There are many resource tools that are availalbe for the LO, make sure yours has been through this training before you have a deal that is behind a learning curve.
Charles,
This is excellent information. Having owned my own mortgage companies in the past, I know how challenging it is to keep up with all the guidelines. Now, being new to San Diego, I will be on the lookout for a lender who is up to date on these guidelines.
Hi Charles-
I assume that this applies to S-corps as well. What a pain! Down payment, great credit, adequate salary. what more do the "self-employed" have to do?
Excellent post! I'll be e-mailing this to my lenders for comment on Monday.
--Sara in San Antonio
Sara in San Antonio,
It applies to all types of corporations, partnerships, trusts and more.
My main point in bringing this up, besides the fact that it seems like nobody has seen it coming, is to point out that Realtors (particularly when they're listing a property) might want to modify the questions they ask of buyer's reps and their clients this year as well as double checking that they're paired with the right lender.
I gave an example earlier of what kind of question a listing agent might want to ask of a buyers agent but let's say you're an agent that likes asking diagnostic questions of your buyers to see if they're going to have trouble qualifying.
Charles this just reinforces the need for buyers to be upfront from the start. Trying to cut corners and conceal information only causes extra work for everyone. So even though the regs have gotten stiffer, it makes it that much more important to let our buyers know how withholding information can hold up the process of full approval and increase frustration. Good looking out.
When working with SE I first need to see tax returns. Folks really don't know (or want to say) net.
Have a great day
Tony
Thanks for the update. It's much appreciated.
nothing new here, just full doc self employed loans.
last two years tax returns-all schedules, and corporate returns, if applicable. get ready for this year to date p&l's at this time of year.
this is what it was when i started, and this is what it is now.
i'd be real careful about suggesting verbiage that should be put into a real estate contract unless you have a realestate license.
Jay,
Clearly you didn't read the attachments. I'm assuming you didn't start in July of 2009 as you seem to be a veteran.
I assure you that while it is similar to our stone age methods, it's different. The income analysis form is not optional anymore. Loan officer can't submit tax returns to underwriters and wait for them to make the income determination. And, the 4506t is not a substitute for the analysis and, if need be, the basis for income calculation.
As for the verbiage, that came from a real estate attorney who also owns a brokerage. Thanks for your concern though.
Thanks for bringing up the self employed income analysis. I had not learned this yet.
On the money as usual, Charles.
Excellent post. .I'm marking it and subscribing to your blog . . thanks!
This reminds me of the budwiser commercial, too light and too heavy. Approvals were too light which got the economy in a mess, now approvals seem to heavy for buyers to get a loan.
Charles,
Thank you SO MUCH...I am sure you have helped a lot of us out there in the trenches on this one!!!! I checked out the attachment on self employment income analysis....
Charles, this past year the buyer of my client's home was self-employed, and the approval process dragged on for weeks. This is an excellent post and I have bookmarked it. We do need to be prepared, and I appreciate your suggestions.
Good points Charles. Realtors are going to have to make some adjustments here. Aside from increasing communications with the buyer's agent, many listing agents may want to make sure that they are picking up the phone and speaking directly to the mortgage officer that wrote that pre-approval letter! I spoke to one Wednesday that was shocked that a listing agent called him! He said it had been more than two years since a listing agent actually called and asked questions regarding one of his letters. Sad new for our side of the industry. Stop being LAZY!
Thanks for the Terrific Post, Charles,
After seeing several deals fall through in 2009 for various lender issues, I appreciate this info to sharpen up even further on lending practices.
I look forward to 2010!
Thanks for the information. I'll be sure to be more vigilant with self-employed buyers.
Thank you for this great information. It's great to be learning on here and keeping up with this ever changing business. Kudos to you for keeping up with the newest guidelines!!! Thanks for sharing.
Happy New Year!!!
I am also going to forward to my two Lenders to make sure they're on top of this. If you ever decide to get licensed in Oklahoma, let me know!
Been doing the 4506's for quite a while. What is also interesting is that even if you have a wage earner, all investors are pulling 4506's (tax returns) on borrowers so "random" self employment or other write-offs can kill a deal that in the past would have been A-ok. The tax returns were often never reviewed in the past for a wage earner. Loan officers have to ask 50 more questions these days - but so be it. "That is why we are called professionals" ;) It's high-time loan officers worked at the same level as atty's, CPA's, etc. And if they have to be forced to that's fine by me!
Thank for the heads-up and the advice. I'll watch for this.
Good stuff, but I think Jay above said it best, "full doc loans", just like it use to be, nothing new here.
Well,I'm now more ready, having read your post !!! Thanks !!!!!!!!!!!!!
Back to the way it used to be. You are right though with the fact that very few loan officers know how to look at self employed financial statements and tax returns and make sense of them.
Thank you for the value post! Great content here
pretty interesting comments.
a loan officer can't submit tax returns to an underwriter and wait for their determination?
you mean loan officers did that? then they weren't doing their job, and should not have been dealing with self employed borrowers.
the 4506t doesn't contain all of the info on the tax returns and the irs site states that. the last 4506t i saw didn't have the depreciation, but we already had the returns in hand.
really nothing new here just full doc self employed loans.
"lenders had staffed up with loan officers who were former gym membership salespersons who don't have the technical skill to use an abacus. . . . .? Is that too harsh?"...hilarious and no, not harsh at all. Great post and follow up comments, thanks.
Charles
Thanks for the extremely important information. This will help me greatly with my buyers and sellers.
Excellent.
Jay,
The 4506t does show depreciation. It’s on page 6 of the long form. Its seven pages long and very detailed. The level of detail that the long form contains has, to date, justified it’s usage in lieu of the FNMA Form 1084 and in some cases, the tax returns themselves. I think what you were looking at was the short form which isn’t very informative.
Recently, Wells Fargo’s retail division was trying out a hybrid version of the old Countrywide Fast and Easy loan where they wouldn’t request the borrower’s income documents and would qualify them for the loan based on the income reported on the 4506t report. This was this year! And yes, for years loan officers have put together their best effort guess on income calculation for self employed borrowers and ultimately submitted tax returns to the borrower to the underwriter for final determination. It’s true that this is not the best way to do it but no loan officer with any kind of experience in this business could pass a polygraph stating that they prepare a self employed income analysis (Fannie Mae Form 1084) on every borrower with any kind of self employed income features. That would just be untruthful.
To suggest that there’s “nothing new here just full doc self employed loans” is disingenuous and false. I’d challenge anyone in the industry to come up with a published Fannie Mae or Freddie Mac guideline or announcement prior to 2009 that states that the agencies won’t purchase a loan without the FNMA form 1084 in the file (like the one’s attached). It/They doesn’t exist. That would make this inherently new.
To make this sound like a commonplace practice doesn’t serve the Realtors in this community very well. Because most loan officers slop their way through self employed borrowers, Realtors need to be ready for what most loan officers will do. How’s that for easy math?
My unsolicited recommendation would be that you not make light of this, bring it to the attention of Realtors that send you business so they don’t end up having unforeseen bad experiences with some other loan officer in a way that might hurt their bottom line and use it as a reason for why they should use you since you seem to have such a good handle on it.
more changes and hoops to jump through. You'd think that it would be easy to buy a house as a realtor afterall that's what we do full time. When stated income vanished I knew it would be headaches. I still think the benefits of being self employed outweight the negatives.
glad I am not buying a house this year, let me take that back. I hope to buy at least 1 income property. Better start preparing now.
Thank you thank you I read all of the attatchements. This will help me this years thanks for your hard work your customers are lucky to have you
thank you for explaining all of that to me.
I like the thinly-veiled undercurrent of "see how much better of a loan guy I am than your guy" throughout this blog post -- that being said, you make excellent points here and this post is loaded with good stuff. So, on the whole, congrats.
What was once old is new again, I do not understand why ever-one is so upset. What is wrong with someone wanting to borrow money, prove that they deserve it. no doc loans should have never been allowed
Charles, Thanks for the information. I had no idea about the passive income issue.
Self-employed borrower=ugh. It's sooooo tough these days. I do like your statement to put into the contract. Will use!
Thanks for the information. I will be sure to keep this in mind.
Seems like 2010 will be the year of the New Forms - with the Hud-1 and GFE added to your list ...this first quarter will certainly have some adjustment periods as to how we all do business.
John
Charles, I was referred to this post by Monique Hailers' post. I never realized any of this and wanted to thank you for this post.
Charles-
This is a fantastic post. After your phone call on Friday I subscribed to your blog and appreciate all of this information on this topic. One of my favorite loan officers did send me a lot of this information last month but I really like the explanations and business ideas you have here. Obviously you are very well-informed on this and I'm happy to learn what I can from you. I will refer any future clients I have in St. Paul to you.