Friday, April 18, 2008

DU Self employed vs 1099

When I am out calling on brokers I run into this dilemma all the time. Many are under the impression if a borrower receives 1099 income they are self employed. They maybe but many times they are not. See Fannie Mae's definition below defining self-employed borrowers:

"We consider any individual who has a 25 percent or greater ownership interest in a business to be self-employed. A number of factors need to be considered in underwriting a self-employed borrower, some of which may be beyond the borrower’s control (although they still have a significant effect on the borrower’s business). The lender should analyze each of the following factors before approving a mortgage for a self-employed borrower:

the stability of the borrower’s income;

the location and nature of the borrower’s business, the demand for the product or service offered by the business, the financial strength of the business, and the ability of the business to continue generating sufficient income to enable the borrower to make the payments on the requested mortgage; and

the marketability of the property that is security for the mortgage as a private residence (rather than as the location of a business), since the property could be the source of repayment for the mortgage should the borrower’s business fail.
Because income from self-employment may be unpredictable and the business owner often is personally liable for the business debt, self-employed borrowers tend to default at a much higher rate than other borrowers. For this reason, we usually require the lender to obtain a two-year history of the borrower’s prior earnings as a means of demonstrating the likelihood that the income will continue to be received. However, a person who has a shorter history of self-employment—12 to 24 months—may be considered, as long as the borrower’s latest federal income tax returns reflect the receipt of such income for a 12-month period and he or she has a history of receiving income at the same (or a greater) level in a field that provides the same products or services as the current business or in an occupation in which the he or she 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 business, the demand for the service or product, the borrower’s level of experience, and the amount of debt the business has."


A 1099 borrower has the same documentation requirements as a self employed borrower. So why does it matter if they are not self employed? When you run a loan through DU and mark yes, the self employed borrowers taken on an additional risk. If you mark no many times you will get an approval vs. yes. This doesn't mean you should circumvent the transaction and say they are not when they are but don't mark the box if they don't own 25% of a business.

Shirley Nault has been a mortgage professional for over 20 years. Visit her other mortgage web sites go to www.naultfhatips.blogspot.com or www.mtgview.blogspot.com

1 comment:

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