Gene Mundt, a Chicagol Mortgage Originator write another great post on how help move along your mortgage loan application by being pro-active. This is even mor important during the current crises we are facing.
I’m presently working with multiple self-employed mortgage applicants … and as you would probably suspect, the process for these applicants is a bit more detailed in scope.
There are several reasons. A few of those reasons are found in an article I wrote just a few days ago entitled, “Self-Employed and Hoping to Finance a Home? What You Need to Know …”
But perhaps the detail that has historically been the largest stumbling-block and biggest frustration for my clients has surrounded the request for/and obtaining of their Federal Income Tax Return. The COVID-19 pandemic we are now facing has only served to worsen these problems.
Right now, The Internal Revenue Service (from which tax returns are requested), is running on what the IRS website refers to as “a limited staff”. It goes on to state that they are “experiencing delays” regarding paperwork and tax refunds both.
In many cases, these issues are creating an additional layer of problems for mortgage applicants and lenders during the mortgage process and its underwriting.
Why are they an issue/problem?
Current lending requirements demand that most, if not all, loan files include a signed 4506-T (IRS Form #). This form allows and authorizes the Internal Revenue Service (IRS) to confirm the filings of a Borrower (and Spouse/Co-Applicant, if applicable).
It’s important for mortgage lenders to have this documentation. The Federal Tax Return speaks to the total income earned and claimed by mortgage applicant(s) and filed with the IRS and that’s vitally important information for them to have.
For self-employed applicants that often claim a variety of business deductions … this step in the mortgage process can present a bit of a dilemma when it comes time to be pre-approved for a mortgage/mortgage payment.
While filing their taxes, their accountants may have provided them advice regarding their tax responsibilities/payment that … while beneficial to them in regards to what they must pay in income taxes … reaped them a verified income that is insufficient for a mortgage lender to qualify them for a loan. Or, at minimum, the price of the home they hoped to purchase.
But again, no matter the income challenges a client faces, these tax returns are typically required documentation and the information they contain is significant to a lender. The delays currently being experienced (courtesy of the IRS and pandemic) when requesting this documentation are definitely adding an additional layer of stress to an already detailed mortgage process.
So what can a self-employed mortgage applicant do to by-pass or reduce the stress added by these IRS delays?
1. Understand that, if you are self-employed and have decided to buy/finance (or refinance) a home, your tax returns will need to be up-to-date and filed for the previous year
2. If possible, act proactively and have your (filed) Tax Returns available for your lender at the time of application for mortgage
3. If Tax Returns are being requested for you by your lender: Understand that the receipt of the Returns may take longer than they would have in the past because of the delays/issues mentioned above
4. Prior to signing a real estate contract and setting a date for closing, discuss with your agent and lender what response times are currently being experienced regarding the request for tax returns. Realistic and attainable dates for closing dial stress levels down considerably
For Self-Employed Mortgage Applicants: Proactive action is the “medicine” that cures during mortgage application.
Taking proactive action regarding required documentation is wise. And currently, action taken should also include and address those changes that have taken place recently in regards to Mortgage Underwriting.
While I address those recent changes for Self-Employed in my article mentioned and highlighted above, I share them again below.
Self-employed applying for mortgage will now be required to document:
- Income Verifications: Self-Employed borrowers’ incomes are typically verified using the most recent two years of income tax filings. In many instances, as a result of the pandemic, those incomes do not show a current or year-to-date accounting, as the prior year’s tax return is filed in the CURRENT CALENDAR YEAR.
- Underwriting: Mortgage Underwriters need to understand the “true picture” of a Self-Employed borrower’s income and expenses BEFORE the next Tax Filing. That information will need to be generated and documented in what is known as a Profit and Loss Statement (P&L)
- Previously just recommended: Now Profit and Loss Statements will be required for Mortgage Underwriting to review and approve loans for all Self-Employed(s) from the Application Dates of June 11, 2020, and after, until further notice
- Audited or self-generated Profit and Loss Statements: Borrowers will be required to provide self-generated/and signed Profit and Loss Statements to the current period in 2020. (P&L must not be older than 60 days old, as of the note date)
These Statements must include info/reports regarding:
- Net Income (Including the most recent month preceding the date of Loan Application)
- 2 business depository account(s) statements (no older than the latest 2 months represented on the year-to-date Profit and Loss Statement)
- Business Revenue
* Until further notice, the above will be required on all Conventional Loan applications to meet Fannie Mae/Freddie Mac standards.
At the risk of being redundant, I again say that any actions (regarding the above) that can be taken proactively and prior to making an application for mortgage will help speed the mortgage process along. And they will relieve and lower frustration and stress levels throughout a mortgage processing.