My analogy to guidelines these days is they are like trying to hold jello in the palm of your hand. Squishy, slippery, moving; slipping through your fingers!
Patience is a virtue! We need to understand that underwriters spend MUCH more time determining the amount of income that can be used for qualifying, how consistent it is or will be, the job status of employees, viability of employer’s business and documenting the file to meet secondary market guidelines.
Enter LL-2020-03 version 5.0 – latest announcement from Fannie Mae. Don’t get caught off-guard when originating your next self-employed borrower.
According to the latest announcement, which has been updated four times since it was released on March 23, 2020 due to changing market conditions we may need more documents!
Mortgage Loan Originators need to perform extra care in determining what documents will be required for self-employed borrowers as well as start asking different questions. The Ability to Repay (ATR) requires all lenders to determine stability of income with a reasonable expectation of its continuance.
Additional or new documentation will be required. Notice the difference between AUDITED and UNAUDITED Profit and Loss statements.
- AUDITED YTD profit and loss statement up to and including the most recent month preceding the loan application date; OR
- UNAUDITED YTD profit and loss statement; signed by the borrower, MUST INCLUDE the most recent month preceding the application date, AND two RECENT BUSINESS account(s) statements (no older than the latest two months) represented on the year-to-date profit and loss statement.
So to clarify, let’s say the YTD P&L is as of June 30, 2020. BUSINESS bank statements can be no older than May and June. Timing will also play a part in how quickly the P&L is completed and when they can obtain the most recent statement. You will need to watch your 1003 dates and if you are in a purchase, originators will need to discuss timing needs based on dates.
- This is somewhat of a drastic departure from previous guidelines of averaging income and only needing tax returns. Originators may find themselves challenged to determine :
- are the deposits enough?
- do the deposits reconcile with the P & L for that time period?
- are they consistent with prior months?
- how to discuss the business in a sensitive manner to consider the impact all of this is having on the borrowers?
Your Account Executive may or may not be able to help you. It’s new for everyone! Individualized assistance on a loan-by-loan basis is now available.
CONTACT: firstname.lastname@example.org (866) 256-3766