Mortgage rates tick down; Fannie Mae plans to OK newly self-employed borrowers
By Jeff Lazerson
Starting July 29, Fannie Mae will be approving self-employed borrowers, having as little as just one-year of self-employment history. Holy Toledo!
Fannie Mae, Freddie Mac, the Federal Housing Authority and the Veteran’s Administration have historically required a minimum two-year history of being self-employed in order to use two years of self-employment tax return income.
Self-employment is defined as owning 25 percent or more of a business or company.
Fannie’s guidelines imply it has previously approved self-employed borrowers with just one year of tax returns. That’s never been my experience as a 31-year mortgage originator. And, friends in the business were laughing louder than me at Fannie’s claim.
In fact, Fannie’s conventional mortgage competitor, Freddie Mac, recently tightened up on self-employed borrowers. Freddie previously allowed the averaging of just one year of income so long as you were self-employed for at least two years. Freddie currently requires a 5-year history of being self-employed in order to use the most recent one year of tax returns.
Now, Fannie is going positively edgy. And, I have to say I like it!
If your most recently signed prior tax returns reflect the receipt of the same or more income with similar responsibilities in a field of work that provides the same product or services as your current self-employed business, you may be good to go for a new home loan.
Typical of Fannie, its black box underwriting engine named Desktop Underwriter or DU can be a hit or miss as far as getting a credit approval. Fannie’s general underwriting guidelines are transparent. Its automated credit decision algorithms are opaque. Loan officers will tell you that on occasion they’ve been baffled by DU’s decision in contrast to its written guidelines.
The biggest takeaway for me is Fannie Mae’s common sense. Think about it. You work in a trade or profession, selling a product or service. You know what you are doing and you are a hard worker. You have the intestinal fortitude to go out on your own. You are earning a profit being self-employed after just one short year. You’ve proven yourself!
If you fit this bucket of newly self-employed borrowers, and you are thinking about purchasing or refinancing, plan ahead. Apply for the loan on a pre-approval basis to be sure you are good to go before you spend the time and money on an appraisal.
Jeff Lazerson - Mortgage Columnist since 2011