Fannie Mae and Freddie Mac are starting to take a more balanced approach in the way they view mortgages.
The change about self-employment income not hurting your W-2 income is one such example of that. Here’s what you need to know if you have both income types are looking for a mortgage…
Up until recently if you were to carry two jobs one as your full-time W2 job along with side business that showed a loss on paper, the lender hit that loss against your income resulting in less borrowing power making it more difficult for you to purchase or refinance a home.
Both Fannie Mae and Freddie Mac now will allow you to use your normal W-2 income even if that loss is still happening with your self-employment business as long as your main income is the W-2 wages from your traditional job. The Schedule C income that is otherwise showing as a loss will no longer hurt your borrowing chances subsequently improving your borrowing power to purchase or refinance your mortgage.
The bank you’re working with not allowing you to do it? Get a second opinion. Not all mortgage lenders interpret guidelines the same just because Fannie Mae and Freddie Mac will allow the guideline. Remember the lender you select bears all the risk associated with granting your mortgage request. Some lenders chose to originate less risky loans. Others to hedge against that risk impose on mortgage borrowers’ overlays. These overlays are additional layers of credit risk built onto that lender’s policy that effectively says if you apply with XYZ Bank they’re going to force place more stringent requirements on the loan that you are getting so they can cover their own hide so to speak. These could mean any of the following:
- Refusing to grant a loan unless your credit score is higher
- Refusing to grant a loan unless your debt to income is lower
- Refusing to grant a loan with a co-signor
- Refusing to grant a loan with a loss from a side business
The above are just few examples of lender overlays. Some lenders will get tricky saying they have no overlays. What they fail to share is that while they may not have overlays, they have policies (same thing) which dictate what types of loans they will do regardless of the actual government guidelines.
It is unequivocally in your best interests to work with a lender that does not operate with such overlays or policies that limit your choices. You want a lender that is a full Fannie/Freddie seller/servicer which increases the likelihood your loan is originated to actual guideline. Moreover, work with a lender that is willing to push the envelope. How a lender may interpret a guideline could also work to your favor especially if you have a quirky or technical situation. It’s worth it for you to work with an experienced lender who is acutely verse in changing guidelines they evolve over time.
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