Self Employed For Less Than 2 Years
It’s one of the most common rules of mortgages: If you’re self employed, you need a 2 year history. If you don’t have one, call Jeff at “Loans R Us” for a high rate on a non-QM loan for your special circumstance. It’s also a pet peeve of mine, and something I spend far too much time fighting about in the comments section of various lender facebook groups- you do NOT necessarily need a 2 year history to qualify for a standard mortgage while self employed. Let’s start with the actual guidelines:
Fannie Mae: However, the income of a person who has less than a two-year history of self-employment may be considered, as long as the borrower’s most recent signed personal and business federal income tax returns reflect a full year (12 months) of self-employment income from the current business. The loan file must also contain documentation to support the history of receipt of prior income at the same (or greater) level and in a field that provides the same products or services as the current business, or in an occupation in which they had similar responsibilities to those undertaken in connection with the current business. In such cases, the lender must give careful consideration to the nature of the borrower’s level of experience, and the amount of debt the business has acquired. (See Selling Guide)
Freddie Mac: In certain instances, a Borrower may not have a current two-year history of self-employment; yet, the income and employment may still be considered stable. When the Borrower has been self-employed for less than two years, the Seller must obtain supporting documentation sufficient to determine whether the income is stable. At a minimum, the Seller must: onsider and evaluate the Borrower's experience in the business. Document that the Borrower has a combined two-year history of receipt of income from the current self-employment and the prior job in the same or similar occupation or industry Determine qualifying income by using the lesser of the income from the new business or prior occupation… (And a couple other things, see selling guide)
FHA: The Mortgagee may consider Self-Employment Income if the Borrower has been self-employed for at least two years. If the Borrower has been self-employed between one and two years, the Mortgagee may only consider the income as Effective Income if the Borrower was previously employed in the same line of work in which the Borrower is selfemployed or in a related occupation for at least two years. (FHA Handbook)
VA: Generally, income from self-employment is considered stable when the borrower has obtained such income for at least 2 years. Less-than-2-years cannot usually be considered stable unless the borrower has had previous related employment and/or specialized training. Less-than-1-year can rarely qualify; however, in-depth development is required for a conclusion of stable income on less-than-1-year cases. (VA Lender Handbook)
So why does everyone say 2 years? Why have I had underwriters, who have spent years developing the specialized skill of interpreting these guidelines, say that 2 years is a requirement until I point them to these paragraphs? That comes down to the risk the lender takes on when originating your loan. The lender holds your loan on their credit line until they can complete the process of selling it to the end investor, and time is money! Guidelines which require more of a judgement call versus black and white documentation are ones that frequently have trouble with the end purchaser needing additional information or explanation. Delays here can mean that the lender loses money on your loan because of their cost to hold it longer than anticipated, so many lenders simply won’t take the risk. In fact, that’s so common that if you ask most mortgage pros how long you need to be self employed, they’ll tell you 2 years as though it’s the rule.
Except, clearly, it isn’t! This is an area where a broker can be a great ally - not all lenders are equally willing to work with borrowers in that 1-2 year range, and working with a broker means they can call several lenders to review your scenario and ensure that your loan ends up with one that is on board to get you to the closing table!
