Wednesday, March 25, 2015

Self-Employed Borrowers Guidelines for Fannie Mae Loans Changing April 1st, 2015

Changes to Kentucky Fannie Mae Conventional loans April 1st, 2015 guides for self employed borrowers

Schedule K-1 (IRS Form 1065 or 1120S) for the most recent two years is required when using business income to qualify.

Business income may be used in qualifying the borrower only when there is a history of income distribution to the borrower consistent with the level of income being used to qualify.

Fannie Mae requires not only that the borrower receive distribution, but that the underwriter qualifies the borrower with the lessor of the distributions or the ordinary income.

Freddie Mac is not making these changes
If your SE borrowers don't have a 2 year history of K1 distributions, go LP!

HUD 4000.1 establishes guidelines for the lender to follow in order to establish the borrower’s DTI. On pages 249 and 250 we find the following:
“The Mortgagee must determine the Borrowers monthly liabilities by reviewing all debts listed on the credit report, URLA, and required documentation. All applicable monthly liabilities must be included in the qualifying ratio.”
Some types of debt may be omitted by the lender in certain cases. For example, “Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrowers gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.”
There are also requirements for situations where the borrower is listed on an account but does not use that line of credit. “Accounts for which the Borrower is an authorized user must be included in a Borrowers DTI ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrowers DTI.”
That is one reason why it can be very important to consider what you are a co-signer or a co-borrower for prior to applying for a home loan-there is potential for such accounts to be a liability for the borrower if payments aren’t made on time, especially for the 12 months leading up to the FHA mortgage loan application.
HUD 4000.1 adds, “Loans secured against deposited funds, where repayment may be obtained through extinguishing the asset and these funds are not included in calculating the Borrowers assets, do not require consideration of repayment for qualifying purposes.”
With the rules in this section, additional lender standards may apply, so it’s best to discuss your situation with a loan officer if you aren’t sure whether a given issue related to DTI might affect your application.