Fannie Mae Update: New Guidelines for Self-Employed Borrowers

Fannie Mae has recently made changes to its Selling Guide that impact self-employed borrowers. This development is being seen as another setback from Fannie Mae, which had been a preferred option over Freddie Mac for certain reasons.

The Changes

The update to the Selling Guide clarifies the requirements for the use of self-employment income when the borrower has less than a two-year history of self-employment. This clarification now includes a requirement for the signed personal and business federal income tax returns to reflect a minimum of 12 months of self-employment income from the current business.

While it could be argued that the previous guidance already implied this, Fannie Mae has now made it explicit, leaving no room for doubt.

Impact of the Change

This change has significant implications for self-employed borrowers who became self-employed after January of the prior year. Their tax returns would not reflect a minimum of 12 months of self-employment income until the following year’s taxes are filed.

For instance, if a borrower became self-employed in March 2022, the 2022 filed returns would not show a full (minimum) of 12 months self-employed income until such time as the 2023 returns are filed.

Other Changes

There have also been other important changes related to tax return requirements for self-employed borrowers that impact the variances that Fannie Mae had over Freddie Mac.

Tax Return Requirements for Self-Employed Borrowers

Fannie Mae is now introducing a rule that ties the ability to only acquire one year of returns to the length of self-employment, similar to what Freddie Mac requires. This is known as the 5-year rule for the existence of the businesses.

Full Requirements from the Announcement

For increased transparency in this documentation policy, Fannie Mae updated the policy to allow one year of personal and business tax returns when:

1. All self-employed businesses have been in existence for five years, and
2. The borrower has had a 25% or greater ownership interest for the last five consecutive years.

Before this change, the outcome of whether you could obtain only one year of tax returns was based on the risk characteristics of the file as assessed by DU and not on how long the business had been established.

In conclusion, Fannie Mae’s recent updates present new hurdles for self-employed borrowers. The changes, which include stricter requirements for tax returns and the length of self-employment, aim to reduce risk but may also limit options for some borrowers. These updates underline the need for self-employed individuals to be proactive in managing their finances and staying abreast of changes in lending policies. Despite the challenges, understanding these rules can help borrowers make informed decisions and find the best path forward in their homeownership journey.

About Innovative Mortgage Brokers

At Innovative Mortgage Brokers we provide comprehensive and customized mortgage solutions. We have been instrumental in helping countless borrowers navigate the complexities of the mortgage process, ensuring a seamless experience from start to finish.

Our team understands the unique challenges that self-employed borrowers face, particularly with recent changes to lending policies such as those implemented by Fannie Mae. With our deep industry knowledge and extensive experience, we are adept at finding and structuring mortgage solutions that meet the specific needs of self-employed individuals with access to programs, and numerous options.

What sets us at Innovative Mortgage Brokers apart is our commitment to innovation and customer service. We leverage advanced technology to streamline the application process, making it more convenient and efficient for borrowers. Our online platform allows borrowers to apply for loans, upload necessary documents, and track their application’s progress in real time.

But our innovation goes beyond technology. We also offer a range of non-conventional loan (Non-QM) products tailored to diverse borrower needs. Whether you’re a freelancer with fluctuating income, a business owner with less than two years of operation, or someone with a less than perfect credit history, at Innovative Mortgage Brokers we have a solution for you.

In addition to providing solutions, we place a strong emphasis on education. We believe that informed borrowers make better financial decisions. Hence, we provide resources and tools to help clients understand the intricacies of their mortgage options and make decisions that align with their financial goals. If you are looking for a mortgage in Pennsylvania (PA) or Florida (FL), give us a call and an opportunity to demonstrate our knowledge and competitive rates.

In the wake of the recent changes by Fannie Mae, partnering with a knowledgeable and forward-thinking broker like Innovative Mortgage Brokers can be invaluable. We remain committed to guiding our clients through these changes and helping them find the best path towards homeownership.