Borrowers Must Financially Prove “A Reasonable Expectation of Continuance”

Fannie Mae issued a lender letter on Wednesday, May 27, 2020 with additional requirements for borrower’s business that are self-employed. These new requirements were necessitated by “the pandemic’s continuing impact on businesses throughout the country,” Fannie Mae said.

“Income from a business that has been negatively impacted by changing conditions is not necessarily ineligible for use in qualifying the borrower,” the letter said. “However, the lender is required to determine if the borrower’s income is stable and has a reasonable expectation of continuance.” Lenders are encouraged to apply these requirements to existing loans in process; however, they must be applied to loans with application dates on or after Jun. 11, 2020 until further notice. Fannie Mae said lenders were “encouraged to apply these requirements to existing loans in process.” “Lenders must review the profit and loss statement, and business depository accounts if required, and other relevant factors to determine the extent to which a business has been impacted by COVID-19,” the Fannie Mae letter said.

Income Analysis

Self-employment income is variable in nature and generally subject to changing market and economic conditions. Whether a business is impacted by an adverse event, such as COVID-19, and the extent to which business earnings are impacted can depend on the nature of the business or the demand for products or services offered by the business. Income from a business that has been negatively impacted by changing conditions is not necessarily ineligible for use in qualifying the mortgage borrower.

However, the lender is required to determine if the borrower’s income is stable and has a reasonable expectation of continuance. Due to the pandemic’s continuing impact on businesses throughout the country, lenders are now required to obtain the following additional documentation to support the decision that the self-employment income meets our requirements:

An audited year-to-date profit and loss statement reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application date.

Or an unaudited year-to-date profit and loss statement signed by the borrower reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application date, and two-business depository
account(s) statements no older than the latest two months represented on the year-to-date profit and loss statement. Or for example, the business depository account statements can be no older than Apr. and May for a year-to-date profit and loss statement dated through May 31, 2020.

Contact one of our loan consultants to learn more about this program.