Updates to Self-Employed Borrower Documentation Requirements on Fannie Mae and Freddie Mac Transactions

Homebridge is updating our self-employment income documentation to align with recently published improved guidance in Fannie Mae Lender Letter 2020-03 and Freddie Mac Bulletin 2020-44, both dated November 13, 2020

The updated policy applies to self-employed borrowers who utilize an unaudited YTD profit and loss option only.  There is no change to the previously issued guidance for borrowers utilizing an audited P&L (refer to Homebridge Bulletin 20-36, issued June 15 2020 or the Homebridge Fannie Mae or Freddie Mac guidelines posted on the Homebridge website for audited P&L guidance)

As a reminder, the self-employed policy (whether using an unaudited or audited P&L) is in addition to standard self-employed requirements, as determined by DU or LPA.

Unaudited P&L

When an unaudited YTD P&L the following requirements apply:

  • The P&L must cover the most recent month preceding the loan application date (no change), and
  • The P&L may be prepared by the borrower or a financial professional (no change), and
  • The borrower must sign and date the P&L (no change), and
  • The P&L must be dated no more than 60 calendar days prior to the Note date (no change), and
  • Three (3) months business bank statements (NEW, previously 2 months bank statements required)
    • The bank statements cannot be older than the last three (3) months represented on the YTD P&L (e.g. if the P&L is dated through October 31st, the bank statements provided must be from April and May)
    • Personal bank statements are acceptable when the borrower does not have a business bank account subject to:
  • All deposits must be specifically identified, to determine which were personal and which were business related
  • A reasonability test applies. Personal bank statements are only acceptable for smaller businesses; larger businesses with significant income on business tax returns are not eligible to use personal bank statements.
    • Businesses claiming to operate on a cash basis where business or personal bank statements reflect minimal deposits will be subject to additional review and/or documentation and Homebridge management approval
    • The Note date must be ≤ 60 calendar days from the end date of the most recent bank statement

Income Analysis Requirements

When an YTD unaudited P&L is provided the Homebridge underwriter must validate the P&L by comparing it to the bank statements

  • The gross revenue/gross income on the P&L must be reasonably consistent with the deposits listed on the bank statements. Homebridge will consider a 10% variance reasonable (NEW; previously expenses were also validated against the bank statements)

NOTE:  Expenses are no longer required to be validated against the bank statements (NEW)

  • If the information on the bank statements and the P&L are consistent, the P&L is considered validated
  • If the information is not consistent, additional documentation will be required to validate the unaudited P&L (e.g. month-to-month or quarterly trending reports with additional bank statements)
  • If the additional documentation cannot be provided, or it does not resolve the discrepancy, the self-employed income cannot be used

Establishing Income Stability

  • The net income on the validated P&L (NEW; previously expenses considered) is compared to the qualifying income (qualifying income is determined by standard self-employment income guidelines) to determine the stability of the business and income. Requirements vary based on the results of the comparison
  • Income level has NOT declined: The qualifying income is calculated using standard Fannie Mae/Freddie Mac self-employment income requirements. The P&L is not considered (no change)
  • Income level HAS declined: Additional documentation is required when the income level has declined to determine if it is now stable.  The following is required: (no change)
    • A letter of explanation (LOE) provided by the borrower and/or their accountant/CPA is required. The LOE must specifically address:
      • The decline in income, and
      • Why they believe the decline has stabilized, and
      • That the net income is not expected to further decline
    • If the LOE validates the income is now stable no more than the current level of monthly income from the P&L can be used for qualifying (no change)
    • If the LOE does not validate the income is now stable, the income cannot be used for qualifying (no change)

The updated improved policy may be applied immediately, to new submissions and loans currently in the pipeline, and is required for loan applications dated on or after December 14, 2020

The Homebridge Fannie Mae and Freddie Mac guidelines have been updated and posted on the Homebridge website at www.HomebridgeWholesalde.com