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Conventional Self-Employed Changes

As stated in this week’s Fairway Connection, effective with loans submitted to underwriting on and after June 8, 2020, the following requirements have been made for conventional loans. Both FNMA (in LL-2020-03) and FHLMC (in Bulletin 2020-19)   have announced requirements for additional documentation to support the decision in the qualification process of self-employment.

Key guideline requirements are as follows:

For self-employed borrowers, one of the following must be obtained:

  • An audited P&L, or

  • An unaudited P&L and 2 months business account statements (statements must be no older than the latest 2 months on the P&L)

    • The gross receipts and expenses on the P&L must be consistent with deposits and withdrawals (expenses) reflected on the bank statements.

  • Note: P&L (both audited and unaudited) must be no older than 60 calendar days old as of the note date and must include the most recent month preceding the loan application date.

    • YTD income must be calculated based on the P&L and compared with the income average (based on tax returns) using the standard income calculation requirements. See Conventional Self-Employment Guidelines in Fairway’s guidelines.

      • Standard adjustments can be made to P&L (i.e. add back depreciation, depletion)

    • The underwriter's review of the income must address any impact that COVID-19 has had on the business / income, using the guidance in LL-2020-03 and 2020-19.  The file must include a written analysis of the self-employed income amount and justification of the determination that the income used to qualify the Borrower is stable.

    • Income Eligibility:

      • If the self-employed income can be classified as stable, the income can be used as follows:

        • Income is the same or has increased (YTD vs tax returns), the income calculated using tax returns can be used in qualifying.

        • Income has declined, only the YTD (based on P&L) may be used in qualifying.

      • If the income has declined and has not stabilized, the income cannot be included for qualifying.

To assist you with the new calculations, Fairway has created COVID-19 Self-Employed Income Analysis Job Aid.

Refer to the Assets topic in Fairway’s guidelines if using business assets to qualify the borrower.

 

Conventional Self-Employed Changes | Client Announcement 2020-06-11