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SELF-EMPLOYED BORROWERS. A borrower with a 25 percent or greater ownership interest in a business is considered self-employed for mortgage loan underwriting purposes.
Minimum Length of Self-Employment: Income from self-employment is considered stable and effective if the borrower has been self employed for two or more years. The higher incidences of failure during the first few years of a new business require the following for individuals employed less than two years:
1) Between one and two years. An individual self-employed between one and two years must have at least two years previous successful employment (or a combination of one year of employment and formal education or training) in that or a related occupation to be eligible.
2) Less than one year. The income from borrower�s self-employed less than one year may not be considered as effective income.
Documentation Requirements. The following are required:
1) Signed and dated individual tax returns, plus all applicable schedules, for the most recent two years;
2) Signed copies of federal business income tax returns for the last two years, with all applicable schedules, if the business is a corporation, an S corporation, or a partnership;
3) A year to date profit-and-loss (P L) statement and balance sheet;
4) A business credit report on corporations and S corporations.
Commission Income: Commission income must be averaged over the previous two years. The borrower must provide his or her last two years tax returns along with a recent paystub. (Unreimbursed business expenses must be subtracted from gross income.) Commissions earned less than one year are not considered effective income.
Analyzing Income: The underwriter will need to establish that the borrower’s earnings trend over the previous two years. Annual earnings that are stable or increasing are acceptable. On the other hand, a borrower whose business shows a significant decline in income over the period analyzed may not be acceptable even if current income and debt ratios meet the guidelines. A very detailed letter of explanation will be required.