When applying for a mortgage, self-employed borrowers are under close scrutiny. This is because their company, due to COVID-19, may not be generating sufficient earnings to: (a) continue paying company expenses, or (b) enable the business owner to reliably make ongoing monthly mortgage payments.

Pre-COVID, business owners needed only to include a self-prepared profit and loss (P&L) statement with their mortgage application (showing that their business remained viable from the end of the most recent tax filing through the current date).

BUT NOW…

With many businesses suffering or having to temporarily or permanently close, mortgage rules for self-employed borrowers have tightened with the following requirements:

• Year-to-date CPA-prepared P&L Statement on the business (or an unaudited P&L plus the last two months of business bank statements) showing consistent revenue during the pandemic

• 2019 business tax return (an extension may not be permitted)

• IRS tax transcripts matching the tax returns provided at application (this may cause a closing delay since this IRS division has not been fully operational)

• Liquid reserves of up to 12 months of mortgage payments

Also, when calculating the Debt-To-Income qualifying ratio, the lender will use the lower of the average monthly: (i) tax return net income, or (ii) recent P&L or bank statement earnings (plus potentially the application of a 10-25% discount adjustment).

More positively, W-2 employees of self-employed businesses receiving hourly wages or salary (working for companies which temporarily closed during the pandemic), can now apply for a mortgage once the company has re-opened after 14 days.

Here’s the Point:  "If you own 25% or more of your company, the requirements for a mortgage have tightened considerably – thanks to COVID-19."

Mike Kanuka, Founder & President