The Good
Self-employed borrowers qualify with previous years’ tax returns, which fortunately will not reflect any slowdowns which might have occurred because of the COVID-19 crisis.
Self-employed borrowers can qualify with 2018 and 2019 tax returns, or with 2017 and 2018 tax returns, if they have not filed 2019 returns yet.
The Bad
Self-employed borrowers will still need to provide “profit and loss” (P&L) statements to cover the periods not covered by the tax returns. But, these P&Ls, which still need to show enough income to qualify, do not need to be audited in most cases, leaving some room for flexibility.
Self-employed borrowers also need to prove that their business remains open, operating and viable. Restaurant owners, for example, with temporarily shuttered operations will have difficulty getting approved.
The Ugly – Limited Non-QM
The ugly has to do with the elimination of most Non-Qualified Mortgage (Non-QM) options. These are the loans that self-employed borrowers, with very limited income on their tax returns, could use to qualify with bank statement deposits and/or rental income (in lieu of tax returns).
The elimination of non-QM loans is what is giving many the impression that self-employed borrowers can no longer qualify for mortgages. But, it is primarily self-employed borrowers who don’t show sufficient income on their tax returns who are having issues.
Some non-QM lenders have returned to the market but the rates, fees and down payment requirements (usually 25% or more), make them not much better than “Hard Money” options (that require no income verifications at all).
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