Owning a business can be one of the most rewarding experiences: Being your own boss, setting your own hours and building something from the ground up are things many people only dream about. As a business owner, you face many unforeseen challenges; obtaining a mortgage is just one of them.
If you’re a business owner of a partnership or S-Corporation, you may have had difficulties obtaining a home loan in the past. Beginning Oct. 1, 2016, Fannie Mae is implementing policy updates that are making obtaining a mortgage easier for self-employed business owners.
The main changes relate to how a lender calculates income cash flow. When lenders perform calculations, they review the money coming in and going out of the business to determine if the owner can generate enough income to meet their financial obligations. Specifically, lenders look at income distributions that are being made or could be made while the owner still successfully runs the business.
Take a look at what the previous guidelines were, what has changed and how these changes may allow you to now be eligible for a loan.
What It Was
Previously, clients were required to do one of two things. One, they were allowed to use only the amount of money equal to the distributions they received from the company when applying for a loan. This was problematic if the owner didn’t use distributions because it could signify to the lender that the company could not reliably pay the owner an income. The owner could not easily verify they could pay the mortgage and thus, they would not qualify for a loan.
Alternatively, clients had the option of providing documentation to prove they had immediate and ongoing access to their business income. This documentation was often hard to get, or non-existent for the self-employed, and might not have accurately showed the borrower’s access to funds. Because many individuals couldn’t prove they could use the money they had to pay toward their expenses, they were turned down for a loan.
What Has Changed and What This Means for You
Now, lenders require less paperwork from you, the client. The lender no longer needs to confirm that you can document your access to income; this eliminates a need to provide documents such as a partnership agreement or corporate resolution. You also now have more time to verify your employment.
Self-employed business owners with an S-corporation or partnership that have previously been denied for a loan may be eligible now. Check in with a Home Loan Expert at Quicken Loans to determine your options today!
For the full list of changes, check out the “Business Income” section of the Selling Guide Announcement SEL-2016-05.
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